Among the large emerging markets, there’s increasing debate regarding whether China or India offers investors the best opportunity for upside. It’s a natural conversation, because both are in Asia and both are among the largest economies in the world.
However, it might not be much of an argument at all, particularly when examining the performance of the WisdomTree India Earnings Fund (EPI). Over the past three years, EPI hasn’t just trounced MSCI India Index. The fund is higher by 52.1% over that span, while the MSCI China Index is down 47.2%.
Of course, past performance isn’t guaranteed to repeat. Although there’s optimism Chinese stocks will rebound in 2024. But many market observers believe India equities will again outpace Chinese rivals in the new year. That could pave the way for EPI to again be a star among single-country emerging market ETFs.
India ETF EPI Has Right Methodology
Not all India ETFs are cut of the same cloth. EPI lives up to the “earnings” billing in its name and endeavors to hold only shares of profitable companies. That’s a critical feature at a time when earnings per share among Indian firms are rising.
“Central to our bullish view on India versus China, is the trend in earnings. Starting in early 2021, MSCI India earnings per share in US dollar terms has grown by 61% versus a decline of 18% for MSCI China. As a result, Indian earnings have powered ahead on a relative basis. And this is the best period for India earnings relative to China in the modern history of the two equity markets,” noted Jonathan Garner, Morgan Stanley’s chief Asia and emerging market equity strategist.
Further adding to the potential of EPI being a winning single-country bet in 2024 are multiple fundamental factors, some of which trump the comparable factors pertaining to Chinese equities. Those include India’s more favorable demographics, forecasts for superior economic growth, and expectations that the rupee will be stable.
Morgan Stanley sees India stocks continuing generating better return on equity than Chinese counterparts, which potentially highlights quality within the EPI lineup.
“Importantly for India, we expect ROE to remain high as earnings compound going forward. And corporate leverage can build from current levels as nominal and real interest rates remain low to history. So the outlook is positive,” concluded Garner. “But for China, the outlook is very different. And in a recent detailed piece, drawing on sector inputs from our bottom up colleagues, we concluded that whilst the base case would be for ROE stabilization, if reflation is successful, there’s also a bear case for ROE to fall further to around 7% over the medium term, or less than half that of India today.”
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