A Smart Emerging Markets Idea For 2018

In a year of strength for emerging markets equities, India is a standout destination. The $1.7 billion WisdomTree India Earnings Fund EPI, one of the bellwether India exchange trade funds, is up more than 32 percent this year.

India, Asia's third-largest economy, is home to some solid economic fundamentals, which bode well for continued upside for India stocks and ETFs such as EPI in 2018. The country is continuing to take steps to open its markets to attract more foreign investment while increasing the ease of doing business within its massive economy.

EPI, which is fast-approaching its 10th anniversary, is levered to some of the more exciting trends in India's economy, including benign inflation and a government that is supportive of the country's major financial institutions.

Central Bank Support

At a time when some developed market central banks, including the Federal Reserve, are mulling interest rate hikes, most emerging markets central banks are going the opposite direction. In fact, Mexico is the only emerging market to boost borrowing costs this year. Count the Reserve Bank of India  among the accommodating central banks in the developing world.

India’s central bank, the Reserve Bank of India (RBI), has consecutively cut

Fortunately, the government has been stepping up to help Indian banks, a potential boon for EPI as the ETF devotes 23.5 percent of its weight to financial stocks, its largest sector weight.

“In a major announcement last month, the Modi government pledged $32 billion in capital for these beleaguered state banks — $20 billion will come from recapitalization bonds issued by the government, while banks will raise another $12 billion from markets,” said WisdomTree.

Bullish Long-Term Forecast

Historical data suggest that RBI rate cuts are usually efficacious for Indian equities, a thesis that EPI and rival India ETFs are proving. Additionally, some market observers are firmly bullish on Indian stocks over the long term.

“Morgan Stanley estimates that India’s equity market could potentially triple in the next five years,” said WisdomTree.“We believe investors should stay focused on profitable companies and on investing across the complete breadth of equity markets.”

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