For Tactical EM Investing, India Is Intriguing

As advisors know all too well, the last several years of emerging markets equity investing hasn’t been worth the trouble. Not when the MSCI Emerging Markets Index returned a paltry 6.3% over that period compared with the 50.6% gain notched by the S&P 500.

Compounding the direness of that scenario, emerging markets stocks were, not surprisingly, more volatile during that span than their domestic counterparts. China was a big part of the problem. Until the start of this year, the world’s second-largest economy spent much of the preceding period employing some of the world’s harshest coronavirus restrictions. Not to be forgotten is calamity in China’s real estate market, which spooked global markets.

Those issues and others highlight one of the primary risks advisors face when directing clients to supposedly diverse emerging markets equity funds, particularly the passively managed option. In reality, many of these products aren’t all that diverse because they devoted 30%-plus of their rosters to Chinese equities. That implies those funds aren’t adequately positioned to capitalize on gains in other developing economies, such as India.

Today, India is the third-largest country weight in the aforementioned MSCI Emerging Markets Index at 14.38%. Not bad, but perhaps not enough to adequately leverage clients to what’s one of the most intriguing long-term opportunities among large developing economies.

India Interesting for Valid Reasons

News flash: India was home to the world’s best-performing equity market in the second quarter, topping Japan for that honor.

What some advisors, and thus many clients, may not realize is that this isn’t a new phenomenon for Indian stocks. Over the past three years, the MSCI India Index returned 61.3% with some of the related ETFs doing far better than that. That out-performance of the MSCI Emerging Market Index and the S&P 500 was achieved with less volatility than those benchmarks.

Advisors and clients are familiar with the phrase “too big to fail.” Well, when it comes to India, it’s a case of “too big to ignore.” The country is home to the world’s fifth-largest economy and is on pace to soon pass China for biggest population.

“India's GDP is expected by economists to grow faster than 6% in each of the next three years, compared to the U.S., which is expected to grow less than 2%. The International Monetary Fund forecasts India to be the third-largest economy by the end of the decade, overtaking both Japan and Germany,” according to Charles Schwab research.

Add to that, India is the world’s largest democracy, indicating that some of the political risk often associated with emerging markets investing is reduced here.

Speaking of turbulence, Indian stocks have had their bouts with it over the years, but the central bank’s efforts to control inflation and strengthen the rupee coupled with favorable energy prices are taking some of the volatility out of investing in the country.

Momentum for India

If there’s a rub with Indian stocks today, it’s that they’re expensive relative to the MSCI Emerging Markets Index. However, India has warranted the lefty multiples with earnings growth and superior returns. Plus, if low valuations were a reason to buy stocks, emerging markets equities would have long ago shaken out of their funk.

Additionally, India is taking steps to create stickier foreign investment. In the wake of the pandemic, multi-national companies are realizing they need to stabilize supply chains. To some extent, that means trimming exposure to China and moving some operations to India.

India’s “government is making efforts to attract companies by offering incentives for producing in India, easing regulatory burdens and investing billions of dollars in improving the country's infrastructure. It is showing some signs of success. For example, Apple is expected to move some iPhone manufacturing to India,” concludes Schwab.

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