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Written by: Ayush Babel & Jeremy Schwartz
Key Takeaways
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India has experienced significant economic recovery and growth post-pandemic, supported by strong GDP growth and political stability under Prime Minister Narendra Modi.
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Our earnings-weighted investment approach with the WisdomTree India Earnings Fund (EPI) focuses on optimizing valuation by weighting companies based on earnings and excluding unprofitable ones.
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India is positioned as a promising growth engine for emerging markets, with advantages like a young population and pro-business governance, while China's growth faces challenges from government interference and geopolitical tensions.
Backed by strong GDP growth and a relatively calm geopolitical environment, India has witnessed one of the best recoveries and further growth relative to other major economies since the Covid-19 crisis—and it hasn’t looked back since. With national elections wrapped up recently, and an historic third term for incumbent Prime Minister Narendra Modi, India could reap the fruits of political stability and continuity of a number of reforms enacted by this government in the last decade, in the form of pro-business policies, reduced systemic corruption, and decreased bureaucracy and barriers to free markets. The prospects for sustained growth are further boosted by a host of macroeconomic factors that we discussed in a previous blog post. While India remains an attractive investment destination amid global geopolitical uncertainties, we wish to explore how India can be accessed in an efficient way with WisdomTree’s systemic, valuation-aware approach to portfolio construction.
Systematic, Broad-Based Access to Profitable Companies
Launched in 2008, the WisdomTree India Earnings Fund (EPI) was the first U.S.-listed ETF to buy local shares in India. EPI tracks the performance of the WisdomTree India Earnings Index, which is designed to mitigate the valuation risk inherent in buying Indian equities. EPI's strategy represents the broadest possible cross-section of investable and profitable companies. The iShares MSCI India ETF (INDA), on the other hand, provides market cap-weighted exposure to Indian companies without any profitability screens, leading to a greater risk of including unprofitable companies.
Sources: WisdomTree, FactSet, Bloomberg. INDA is the largest fund by AUM in Morningstar’s U.S. Fund India Equity category.
India at a Reasonable Price
We believe that weighting by market cap tends to result in over-weight allocations to overvalued companies and under-weight allocations to undervalued ones. At WisdomTree, we optimize valuation, by weighting by earnings and eliminating unprofitable companies, allowing the most profitable companies to occupy more weight in the Index. This allows EPI to provide investors with access to the broad market, but at a more reasonable price. This approach can lead to better valuation characteristics across the board with potentially better dividend yields and cheaper price multiples.
Sources: WisdomTree, FactSet, as of 6/30/24. Expense ratio and AUM as of 7/18/24. Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. This information must be preceded or accompanied by a prospectus. For the most recent month-end and standardized performance and to download the fund prospectus, click the respective ticker: EPI, INDA.
For definitions of terms in the table above, please visit the glossary.
All That Can Translate to Better Performance
The earnings-weighted approach not only facilitates access to India at reasonable valuations but has also delivered consistent outperformance relative to the market cap-weighted approach. This is evident in the below chart that shows EPI has outperformed INDA over their common period of existence, and even more decisively over the last five years.
Sources: WisdomTree, FactSet, as of 7/17/24. Performance for periods equal to or greater than one year are annualized. Performance is historical and does not guarantee future results. Current performance may be lower or higher than quoted. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For the most recent month-end and standardized performance and to download the fund prospectus, click the respective ticker: EPI, INDA.
Conclusion
China, with a weight of 25.13% in the MSCI EM Index compared to India’s 19.18%, as of June 30, 2024, got there by dominating the emerging markets with sustained growth for the past two decades. However, its current position appears increasingly precarious. We attribute this vulnerability to the Chinese government’s excessive interference in private corporations, ongoing and sustained tensions with the U.S. and factors like growth saturation. These unique risks pose a significant threat to China’s future growth. The latest GDP growth figures underscore this shift, with India’s 8.2% growth outpacing China’s 5.2% in 2023, according to the IMF. India possesses distinctive advantages, including a young population, relatively low per capita GDP, a growing middle class, a stable geopolitical and political environment and a pro-business governance approach. These factors, reminiscent of the conditions that once propelled China’s sustained growth, position India as a potential growth engine for emerging markets in the coming decades.
For more information about WisdomTree go to wisdomtree.com/investments.
Related: Global Markets: Why Japan and India Are Standing Out with Jeremy Schwartz
Important Risks Related to this Article
The purpose of this material is to provide investors with a means to evaluate the investment methodology of the featured Funds and Indexes. It is the opinion of WisdomTree that all funds and indexes are managed differently and do not react the same to economic or market events. The investment objectives, strategies, policies or restrictions of other funds may differ, and more information can be found in their respective prospectuses. Therefore, we generally do not believe it is possible to make direct fund-to-fund comparisons in an effort to highlight the benefits of a fund versus another similarly managed fund. The information included in this material is based upon data obtained from FactSet and WisdomTree’s database, which are believed to be accurate. This material is not considered an offer to sell or a solicitation to buy shares of any other funds mentioned herein. These funds were chosen for comparison due to their similar investment objectives.
There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. This Fund focuses its investments in India, thereby increasing the impact of events and developments associated with the region which can adversely affect performance. Investments in emerging, offshore or frontier markets such as India are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. As this Fund has a high concentration in some sectors, the Fund can be adversely affected by changes in those sectors. Due to the investment strategy of this Fund it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
U.S. investors only: Click here to obtain a WisdomTree ETF prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S.
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