MSCI rebalances can look dramatic in the headlines, but ETF investors need to focus on what actually changes in the benchmark. This matters because country weight shifts, not just deletions, determine portfolio exposure, concentration and how a broad index fund really behaves over time.
India ETFs matter because they combine a country bet with a specific index methodology, creating both opportunity and concentration risk. For long-term investors, the key issue is how that exposure fits within a broader portfolio and whether currency, sector mix, and valuation can change outcomes.
In this white paper, the focus is on how emerging markets’ sound fiscal and monetary policies have led to outperformance over developed markets. The absence of “fiscal dominance” in emerging markets has contributed to their strong bond performance, driven by low debt and deficits. Asia emerges as the primary beneficiary within emerging markets.__JETPACK_AI_ERROR__
India, currently Asia’s third-largest economy behind China and Japan, is poised to lead the region in economic growth. This is expected to benefit exchange traded funds like the WisdomTree India Earnings Fund (EPI), which invests in locally traded Indian equities. EPI is projected to perform well due to the anticipated increase in India’s GDP and the fund’s focus on profitable Indian companies, avoiding those with large debt obligations and high interest rates. The growing tech sector within India’s economy also supports EPI’s strong outlook.
Investors exposed to Chinese equities encountered a difficult 2023, with the MSCI China Index falling 7.6%. The downturn was attributed to factors like geopolitical tensions, advances in other emerging economies, and struggles in China’s property sector. However, as 2023 closes, some predict an improved environment in 2024, particularly for exchange-traded funds (ETFs) such as the WisdomTree China ex-State-Owned Enterprises Fund (CXSE). Improved U.S.-China relations, growing Chinese consumer confidence and increased global investment in China are potential catalysts for this shift.
Given the speculation of the Federal Reserve lowering interest rates and a retreating dollar, the interest in bonds is increasing. Particularly, emerging market bonds are being considered as potential investments in 2024. Specifically, VanEck J.P. Morgan EM Local Currency Bond ETF and VanEck Emerging Markets High Yield Bond ETF show promising yields with lower volatility, making them worth considering despite common apprehensions.
Despite a challenging macroeconomic environment, India remains an attractive destination for emerging markets investors. Many investors are diverting funds from other emerging markets to dedicated India funds. Even with recent geopolitical volatility, India sustains healthy capital allocation. India’s GDP is projected to grow from $3.5 trillion in 2022 to $7.3 trillion by 2030.
The VanEck Emerging Markets Fund marginally outperformed the MSCI Emerging Markets Investable Market Index in Q3 2023, largely driven by successful stock selection in Turkey, Georgia, and Kazakhstan. Fund performance was negatively impacted by its Brazil allocation. Standout contributors included Bank of Georgia and Kazakh payments platform Kaspi.kz. The fund focuses on identifying long-term growth companies at a fair price through robust due diligence.
Despite hurdles in 2023 involving geopolitical risk and high savings rate, China’s economy remains a key diversification option from U.S. equities for investors. The IMF has upgraded China’s growth projections, warranting a closer look at investment options like the KraneShares CSI China Internet ETF (KWEB). This upgrade, along with potential fiscal reforms and increased consumer spending, present a promising investment case for China.
While emerging market ETFs lag behind S&P 500, they register combined net inflows of $6.5 billion. Advisors have concerns over “China-specific risks” and “volatility”. As China forms a large part of emerging markets, several ETFs omit Chinese stocks to avoid these risks. Other options include ETFs owning less volatile Chinese stocks or ETFs providing exposure to the Chinese internet sector with downside protection.
China has imposed export controls on graphite, a key component used in electric vehicle (EV) batteries, starting from 1 December. It cites national security concerns and is not targeting any specific country. The move comes amidst escalating tension in the EV supply chain between Beijing and the West. China, leading the global supply chain of critical minerals, could potentially disrupt the market dynamics and accelerate the search for alternative material sources.
Core Values Alpha (CVA), an affiliate of MSA PowerFunds, has introduced an actively managed exchange-traded fund (ETF) for Chinese equities. The fund invests in high-growth Chinese companies and US companies with substantial revenue from China while prioritizing US values and national security. To this end, it uses a China Risk Scorecard for in-depth risk assessments. The fund believes that carefully navigating China risks can benefit investors amid rising geopolitical complexities.
Despite a projected acceleration of growth from 3.9% to 4.6% in Asia and the Pacific for 2022, experts warn that economic prospects are dimming in the coming years. Factors such as Asia’s aging population, slowing productivity growth, and geoeconomic fragmentation are expected to hinder growth further. However, disinflation is progressing well in Asia, with most countries expected to reach central bank target ranges by 2023.