India makes case for ETF dominance in emerging markets

India makes case for ETF dominance in emerging markets

India has steadily asserted itself as an emerging market power in recent years as its government embarks on a financial and industrial overhaul.

The country’s rapid rise is well documented. India’s GDP is expected to grow 7% in 2024, by far the fastest growth among the world’s largest economies, after the Reserve Bank of India revised its forecast upwards at the end of the year last.

Its rise came at a time when Chinese stocks were falling. The country’s beleaguered real estate sector has been a symbol of its inability to recover from the pandemic, while its strict regulatory stance on technology has led to investor doubts.

This was reflected earlier this year when the weighting gap between Indian and Chinese stocks in the MSCI Emerging Markets Index fell to all-time lows. ETFs focused on India and China are available on etf.com. screening tool. The largest U.S. emerging markets ETF is the $78.4 billion ETF. iShares Core MSCI Emerging Markets ETF (IEMG).

Use the etf.com website comparison tool to see how the iShares MSCI India ETF (INDA)the largest Indian ETF, compares to the largest Chinese ETF, the KraneShares CSI China Internet ETF (KWEB).

Following the rebalancing, India’s weighting increased from 17.9% to 18.5%, while China’s share decreased to 25.4%, down from around 31% six years ago. month and at its lowest point since 2017. A similar scenario can be observed in the bond markets of these countries.

Inclusion of India in the JPMorgan index

JPMorgan’s decision to include India in its global diversified emerging markets index from June 2024 is expected to generate significant flows to the market, as around 23 bonds with a combined value of $330 billion are expected to be included .

Alberto Garcia Fuentes, head of asset allocation at ACCI Capital Investments, believes there are investment cases for China and India, but for contrasting reasons.

“China and India are completely different stories,” he said. “China is a value play while India is a growth country, with the latter focusing on technology and creating new infrastructure.”

If India is growth, China is value

The tailwinds in the Indian economy give it momentum against China. On the one hand, the subcontinent has just embarked on elections that should guarantee outgoing Prime Minister Narendra Modi a third term.

In addition, the world’s most populous country has long enjoyed political – and geopolitical – stability that has allowed it to gain an advantage over China.

“Rising tensions between China and the US have given a boost to the Indian economy,” said Stephen Kemper, chief investment strategist, team advisory office at BNP Paribas Wealth Management. been transferred from China to India.

The story continues

“India is playing a very smart geopolitical game as we move away from US dominance and towards a multipolar world. They even manage to trade with Russia without any major retaliation from the EU. »

Although its high growth rate presents an opportunity for investors, much of this development has already been priced in. The Indian stock market’s forward price-to-earnings ratio is around 20x, compared to its long-term average of 16.3x.

“I wonder how much gas there is in the tank for the Indian market,” Kemper said. “Can it continue to post such superior returns? At the current valuation, the expected return could be less than 5% annualized for the next 10 years, which is not too high.

This is also where the difficulties in the Chinese market could present an opportunity. China’s government is taking steps to address some of property developers’ debt woes, while its technology sector now trades at half its 2020 valuations and, for some, is too cheap to ignore.

“China is the second largest economy and in a global recovery it should do well, just based on its valuation,” Garcia Fuentes said.

Playing on the emergence of India with ETFs

Whether or not India continues to dominate emerging markets, its growing presence is causing investors to rethink their allocations.

Its emergence has led to the launch of several ETF products in recent months, including the HSBC S&P India Tech UCITSETF (HITC), while DWS and BlackRock have both reduced fees on their products, a sign of growing competition .

Garcia Fuentes said India’s growing dominance led the company to sell its country-specific ETF exposures to both China and India in favor of the Xtrackers MSCI Emerging Markets UCITS ETF (XMME) .

“We wanted to diversify our exposure to emerging markets and XMME still offers good exposure to China and India, the two largest players, while also playing in Taiwan, South Korea, Brazil and Mexico,” did he declare.

Kemper added that Indian bonds currently look very attractive compared to China, with the former offering a 7% yield over 10 years while China’s is around 2.3%. “I prefer to buy Indian bonds rather than Chinese ones, although the yield gap is a bit excessive and will probably narrow in the coming years,” he said.

Capital market challenges in India

India has taken steps to improve foreign investors’ access to its capital markets, including rapid digitalization and policy reforms, but some say it still has more to do.

Inés de Trémiolles, global head of trading at BNP Paribas Asset Management, said India’s growth in emerging markets poses challenges for ETFs due to the difficulty of opening an account in the country.

“Increasing India weighting will increase flows to the market, but opening an account in India remains a nightmare,” she said. “Large-scale asset managers will be able to do this, but smaller players will not be able to afford it. »

Kemper noted the improvements made in Indian capital markets, but maintained that China remains the largest emerging market weighting. “China will remain the biggest weight in MSCI for the foreseeable future unless something crazy happens, which I don’t expect,” he said.

However, Garcia Fuentes believes that India’s geopolitical advantage will allow it to overtake China in the long term.

“India will become the largest player in emerging markets, surpassing China, as they benefit from different geopolitical risks and are more open to foreign investors,” he predicted. “China may perform well based on valuations, but overall it is at a disadvantage compared to India.”

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