After posting one of its best annual showings in several years in 2016, the MSCI Emerging Markets Index is off to another impressive start in 2017. The widely followed emerging market index is up 12.8% year to date, or nearly double the returns posted by the S&P 500.
Investors looking for what countries are driving emerging market equities higher to start 2017 do not need to look much further than one of the largest developing economies. India, Asia's third-largest economy behind China and Japan, has been a key driver of the ongoing rebound for emerging markets stocks this year. Recently, scores of India exchange-traded funds (ETFs) have been making new highs. (See also: An Introduction to the India Stock Market.)
Although it enters Monday about 1% below its recently set 52-week high, the WisdomTree India Earnings ETF (EPI) is on fire to start 2017 with a gain of 17.5%. EPI turned nine years old late last month, and with $1.54 billion in assets under management, EPI is one of the largest, oldest and most heavily traded India ETFs listed in the U.S. There is more to the ascent of India ETFs than just increased animal spirits. For example, Indian stocks have recently been bolstered by the convincing win of Prime Minister Narendra Modi's BJP party in the Uttar Pradesh state election.
"Modi’s BJP won a decisive and an unprecedented 80% mandate," said WisdomTree in a recent note. "Not only is this a big thumbs-up to Modi’s governance, but, more importantly, this will boost the party's numbers in the upper house, where a lack of a majority by the BJP has often hindered the approval of key but tough reforms. Also, UP's verdict sets a strong tone for Modi's re-election in 2019." While Uttar Pradesh is not familiar to many U.S. investors, it is India's biggest state with a population that is more than five times the size of California. So, in U.S. electoral terms, Modi's party just resoundingly won five Californias, explaining the use of the term "mandate" and one of the reasons why EPI is surging. (See also: India Economics: A Young Population With Technologically-Driven Minds.)
EPI is a smart beta India ETF, as its underlying index, the WisdomTree India Earnings Index, is weighted by earnings. That methodology not only ensures that the ETF holds profitable companies, but it also helps steer investors away from companies that are potentially overvalued. (See also: 3 Types of Indexing for ETF Success.)
Ebbing inflation, which helped India's central bank pare interest rates, has helped buoy equity markets there. "The last two times that RBI engaged in a consecutive rate cuts, the WisdomTree India Earnings Index (WTIND) responded with double-digit total returns in the year that immediately followed. Thus, solid performance by Indian markets in 2017 so far should not come as a surprise," said WisdomTree. EPI's largest sector weight is financials at 24.3%, indicating that Indian banks have welcomed lower rates, whereas their U.S. peers would love to see the Federal Reserve continue to boost borrowing costs. (See also: Bank of India Cuts Interest Rates to 5-Year Low.)