Investors holding emerging markets stocks and supposedly diversified exchange traded funds are frustrated this year.
Due in large part to China’s ongoing regulatory clampdown, Chinese stocks are flailing, dragging broader benchmarks such as the MSCI Emerging Markets Index down in the process. In fact, China is home to this year’s worst-performing equity market among major developing economies.
Taking all that into account, it’s not surprising that some investors may think that emerging markets equities and ETFs just aren’t worth the trouble this year. India and the WisdomTree India Earnings ETF (NYSE: EPI) indicate otherwise. EPI, which follows the WisdomTree India Earnings Index, is higher by 29.61% and closed last week flirting with record highs. With vaccination rates increasing in Asia’s third-largest economy, there could be more upside in store for EPI.
“India’s COVID-19 recovery has been bolstered by vaccination momentum coupled with stronger macroeconomic data,” according to WisdomTree research. “Until now, the agricultural and industrial sectors have been driving the economic recovery, but we expect faster dissemination of vaccines coupled with easing of lockdown measures to support a significant turnaround in consumption expenditure, which should continue to bolster growth in 2022.”
Evaluating EPI
The $962.4 million EPI is levered to the cyclical value side of the Indian equity market as well as growth segments, as financial services, energy, materials, and technology are the fund’s top four sector allocations.
“On an absolute basis, the top contributors to India’s performance are the Information Technology, Financials, Materials, Consumer Staples and Energy sectors. Apart from the Information Technology sector, these performance drivers help corroborate the cyclical economic recovery we observe from economic indicators,” adds WisdomTree.
Those four sectors combine for over 70% of the ETF’s weight, according to issuer data. All but two Indian sectors are outperforming the equivalent Chinese groups this year, highlighting the benefits of EPI’s fundamentally weighted methodology. That includes employing a variety of liquidity requirements and, more importantly, weighting member firms by profitability. There’s more to EPI’s fundamental story, and it’s good news for investors considering the fund.
“From a fundamental perspective, EPI’s profitability screen and earnings weighting not only adjusts weight back to relative value but also eliminates negative earners—the annual rebalance lowered the P/E ratio of the basket by 3.6 turns while maintaining or improving quality metrics, like ROA and ROE,” notes WisdomTree. “At 12.4 times price-to-earnings, EPI’s valuation is extremely attractive—it’s currently trading at half the valuation of the broader MSCI India Index and below both the MSCI Emerging Markets Index and the MSCI China Index.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
