Kanish Chugh
Investors are changing the way they approach emerging markets (EM), dumping traditional blanket coverage in favour of picking specific countries.
Traditionally, emerging markets investors would buy into a wide range of countries like Brazil, Russia, Turkey and South Africa all at once. They would often do so via emerging markets funds or ETFs.
However, the underperformance of emerging markets in recent years has caused many to change track and be more selective about which countries they are buying.
Zach Riaz, Director and Investment Manager of Banyantree Investment Group, says that about three years ago his team started reducing their broad EM exposure and adding more India and China.
He says: “Close to 70 countries can be put into the EM category. Within that group there’s a big divergence in underlying themes, fiscal and monetary policies, growth profiles and currency dynamics.
“We prefer to look at emerging market from the bottom up because of that divergence of themes and you need to really dig deep into what is important in these markets.”
He adds that underperformance of traditional emerging markets indexes was part of the reason they changed approach.
“If you analyse emerging market returns over the last 10 years, the MSCI Emerging Markets Index is up around 4% or 5%. Developed market returns have been higher. But if you look at India over the past 20 years, the MSCI India delivered a solid return of 8% a year. It supports my view that a more focused approach is a better way to go., he says.
Currently Banyantree’s Multi-Asset ETF-only 70/30 strategy has 13% in EM. It uses ETF Securities’ ETFS-NAM India Nifty 50 ETF (ASX Code: NDIA) for its India exposure. The fund has achieved a total return over the 12 months to 31 March 2021 of +27%.
Riaz says that picking specific emerging markets countries can have challenges. When he started to have conversations with clients about India a few years ago, some said they didn’t understand that particular market. However, the reform agenda of the Indian government in recent years helped convince some investors to give India a chance.
“Now we see greater awareness of structural reforms having an impact on the Indian economy. It’s a fully-loaded reform program, creating opportunities around financials, some industrial sectors and infrastructure.
“The benefits will flow through over the next few years which should flow into companies’ earnings and that’s why we are there.
“There are a couple of other issues to consider. One is how much India will be the beneficiary of the ‘world vs China story’. We may see manufacturing and services moving to India from China. The other is that with the value rotation that is currently underway, the Indian Nifty 50 Index is about 40 per cent financials.”
Kanish Chugh, head of distribution ETF Securities further adds: “Investing in India appeals to many investors right now. The Indian economy is forecast to become the third largest by 2030 according to research by Standard Chartered. However, India’s market capitalisation represents less than 3% of global equity markets. As such, the major emerging markets indices and many emerging markets funds include only a small allocation to India.
“Investors who subscribe to the view that India’s growth potential is greater than its current market size can use NDIA to increase their portfolio’s allocation to India to their desired level,” says Chugh.
Banyantree in an independent research and funds management business, with an experienced team of researchers and portfolio managers. The firm services advisers, family offices, high net worth investors and institutions.