Finding Emerging Market Exposure With Indian Equities

Traditional diversified emerging markets exchange traded fund indexes are often heavily allocated to a small number of countries. While the MSCI Emerging Markets Index features exposure to approximately 15 countries, the widely followed benchmark is Asia-heavy.

And while the MSCI Emerging Markets Index is heavy on Asian economies, what that really means is a large combined weight to China, South Korea and Taiwan. That trio combines for more than 57 percent of the benchmark's weight. India, Asia's third-largest economy, is just 7.8 percent of that index's geographic exposure.

Investors looking for focused India exposure have plenty of ETFs to consider, including the iShares MSCI India ETF INDA and the iShares India 50 ETF INDY. INDA and INDY are down an average of 6 percent year-to-date, but those declines could signal buying opportunities in the eyes of some experts.

Progress And Bright Spots

The role of government is always an issue to monitor with emerging markets assets, and India is no exception. Fortunately, the current regime has been favorable for foreign investors.

“A brightening economy is boosting earnings expectations and, we believe, offers a cushion against potential trade-related shocks,” BlackRock said in a recent note. “The progress India has made in cutting back costly government subsidies on items such as fuel is a prime example of the advances being made in structural reforms under Prime Minister Narendra Modi. Subsidies as a percentage of gross domestic product have declined in recent years.”

Since Modi came to power in May 2014 through the end of 2017, INDA and INDY were up an average of about 36.5 percent, while the MSCI Emerging Markets Index was higher by 20.9 percent over the same period. INDA and INDY have $5.22 billion and $1.13 billion, respectively, in assets under management.

Reforms Matter

The idea of government reforms in developing countries is not new, but effectiveness of reforms is what really matters to investors. On that note, India is on a strong path, according to BlackRock. 

“EM reform is not a new theme. But reform momentum has picked up significantly in a few major countries, such as China and India, fostering a more sustainable growth path,” said BlackRock. “EM equities are coming off a stellar 2017, but we see room for more gains as investors flock back after years of EM underallocation. India — among our favored picks within EM — is a good example of what is on offer.”

India's efforts to reform its banking system are important to foreign investors, because INDA and INDY have large financial services exposure. INDA's weight to that sector is 23.4 percent, which is dwarfed by the 35.4 percent INDY devotes to financials.

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