Among Emerging Markets, India Earnings Picture Looks Interesting

This year will go down as another forgettable one for emerging markets stocks as the widely observed MSCI Emerging Markets Index is lower by 24.8% year-to-date, as of October 6.

Of course, that’s a broad benchmark, and not all developing economies are home to equity markets that are slumping as mightily as the index. Take the case of India and the WisdomTree India Earnings ETF (NYSE: EPI). EPI, which is one of the most seasoned options among India exchange traded funds, is outpacing the MSCI Emerging Markets Index by nearly 1,600 basis points year-to-date.

The WisdomTree ETF’s annualized volatility this year is also 260 basis points below that of the broader benchmark. In other words, EPI’s less bad showing in 2022 could give way to better things over longer holding periods.

“The Indian economy has shown a remarkable post-COVID recovery, facilitated by government efforts to ease compliance burdens on businesses and remove redundant policies and laws,” noted WisdomTree analyst Hyun Kang. “On August 20, the Ministry of Commerce and Industry announced that it simplified almost 20,000 compliances and decriminalized thousands of laws. The significant reduction in red tape is expected to bolster further outperformance and attract investors.”

Two important factors bode well for Indian equities and EPI. First, stocks in Asia’s third-largest economy have been outpacing broader emerging markets benchmarks for some time. Second, EPI’s relative sturdiness this year arrives against the backdrop of rising oil prices.

“Since the start of Q3 2022, the gap between India’s performance and that of other emerging markets has been widening. The differences are even more glaring when comparing India and China (proxied by the MSCI India and MSCI China indexes, respectively),” added Hang. “India, a major oil importer, has benefited as oil prices have slid over 20% since the middle of June. Lower prices will help tamper inflation and mitigate the need for the Reserve Bank of India to aggressively tighten interest rates—a boon to equities.”

EPI has some avenues for capitalizing on rising commodities prices. For example, the ETF’s underlying index — the WisdomTree India Earnings Index (WTIND) — recently rebalanced and boosted its materials sector exposure in the process.

Another benefit of the EPI methodology is that the index only holds profitable companies — an attractive point at a time when the quality factor is meaningful in emerging markets.

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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.