Indian Stocks, ETFs Don't Have To Be Expensive

One of the most oft-used talking points of emerging markets bulls over the past several years has been the inexpensive valuations at which equities in developing economies trade relative to their developed market counterparts.

India, a shining star among large emerging markets last year and less bad than Brazil and China this year, has not been included among the least expensive developing markets. That is the case again in 2015 as the MSCI India Index trades with a price-to-earnings ratio of 20.3 compared to 12.3 for the MSCI Emerging Markets Index at the end of the third quarter. 

Fortunately, investors do not have to pay up to get involved with Indian stocks and that includes not having to pay up for some of the most profitable companies in Asia's third-largest economy. 

The WisdomTree India Earnings Fund EPI, which although lower on the year has trounced its Brazil and China equivalents, follows the WisdomTree India Earnings Index (WTIND). That benchmark is a strategic beta answer to traditional India indexes as it is “fundamentally weighted index that measures the performance of companies incorporated and traded in India that are profitable.” 

EPI's underlying index sports a P/E ratio of just 12.5, almost inline with the MSCI Emerging Markets Index and well below the multiple on the MSCI India Index.

“WTIND had more than 50% of its weight in the lowest-priced quartile, which is significantly more than the MSCI India Index. There is a natural tendency of earnings-weighted approaches to reduce weight to stocks whose prices have appreciated at a faster rate than their earnings, and concurrently to increase weight to stocks that have fallen in price despite exhibiting positive earnings growth,” said WisdomTree in a recent research note. 

EPI's leverage to the Indian consumer is more than adequate, as consumer discretionary and staples names combine for over 13 percent of the ETF's weight. The ETF's underlying index holds the most profitable Indian companies that are accessible to foreign investors. Profitability is the key there at a time when emerging markets earnings growth is, at best, anemic. 

Conversely, EPI's index allocates a scant percentage of its weight to the most richly valued Indian stocks, keeping investors away from names that could be vulnerable to big declines if markets there rapidly decline.

“Although profitability may fluctuate throughout the year, at each annual rebalance WisdomTree requires companies to be profitable before inclusion. This requirement keeps the weight to firms that we believe tend to be more speculative and of lower quality at zero,” adds WisdomTree.