With emerging markets equities and exchange-traded funds bouncing back this year, investors in single-country ETFs have their pick of rebounding funds. That means laggards standout all the more starkly and there are some big laggards among emerging markets funds this year, notably China and India.
The two behemoth economies are, in terms of ETF performances, the undisputed laggards of the BRIC quartet this year as commodities prices push Brazilian and Russian stocks higher. The WisdomTree India Earnings Fund (ETF)EPI is off a manageable quarter of a percent, which is a lot better than the comparable China ETF.
India ETF
To be fair to EPI, one of the largest India ETFs, the fund is up more than 9 percent over the past 90 days. There are reasons to believe that run is more early than late innings. A catalyst for EPI and India's broader market is a familiar one for many emerging markets: the financial services sector.
Often one of the largest sector allocations in a plethora of diversified and single-country emerging markets ETFs, financial services names play a pivotal role in determining the fortunes of these funds. That could prove to be good news for EPI. Non-performing assets (NPAs) have been an issue for Indian banks, one that is being worked through now.
“A host of reasons, ranging from forced and bad lending practices to a slowdown in global growth, has resulted in approximately 20 percent of loan books for public banks being stressed. Any wise doctor would do a proper diagnosis before starting a treatment, and that is precisely what Dr. Rajan did. Steps RBI and the government have taken so far to initiate the recovery of these bad assets include restructuring debt to equity, liquidation of defunct projects, economic revival and introducing a new bankruptcy code to create a faster exit mechanism for banks,” according to a new WisdomTree note.
Index, Holdings And Allocations
Indian stocks are pricey compared to the MSCI Emerging Markets Index, but EPI helps ameliorate that problem by allocating more than half its weight to the quartile of Indian stocks with the lowest valuations.
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.
“Banking assets in India reached $1.46 Trillion as of Nov. 2015 and is expected to be $28.5 Trillion by FY25. We believe that there is tremendous upside potential for investors by participating in economic growth of India,” added WisdomTree. “Investors who invest in India—Financials and specifically private banks—get an exposure that not only is potentially healthy, stable and increasingly accessible but also has unprecedented projected growth potential in the medium term.”
The health of Indian banks integral to EPI because the ETF allocates nearly 23 percent of its weight to the financial services sector making it the fund's largest sector exposure.
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