Emerging markets stocks and exchange traded funds are outperforming U.S. equivalents this year and India is a key contributor to that out-performance. For instance, the WisdomTree India Earnings ETF (NYSE: EPI) is up 27 percent year to date, an advantage of almost 350 basis points over the MSCI Emerging Markets Index.
India's out-performance of broader emerging markets benchmarks is not new. EPI, one of the oldest and largest India ETFs trading in the U.S., is up 19.6 percent over the past three years while the MSCI Emerging Markets Index is up just 2.9 percent over that period. Much of that bullishness is attributable to reform efforts, led by Prime Minister Narendra Modi.
India's central bank, the Reserve Bank of India (RBI), has helped as well. RBI has been one of Asia's more accommodative central banks, having recently lowered interest rates by 50 basis points, though RBI's official stance is neutral not accommodative.
A catalyst for EPI and rival India ETF's is the country's effort to overhaul its goods and services tax, which is currently burdensome, particularly for business owners.
“This is one of the biggest tax overhauls done by any nation and will have a far-reaching impact on the economy,” said WisdomTree in a recent research note. “Under the country’s federal taxation structure, businesses previously had to keep track of a laundry list of taxes as they move from state to state. This meant serious inefficiencies in the system and encouraged tax evasion, especially by smaller businesses that found evading taxes easier than reporting.”
Reforming GST is already bearing fruit, which is evident in recent economic data.
“This implies easier tax policy, which would lead to higher tax reporting and auditing and would bring the entire country under one tax ambit,” said WisdomTree. “India’s economic expansion can go up by 1% to 2% because of the increased efficiency in the system.”
As is the case with many single-country emerging markets ETFs, EPI is heavily allocated to the financial services sector. That sector represents over a quarter of the ETF's weight, but that is not necessarily a drawback when acknowledging that the ETF's methodology aims to include profitable companies trading at compelling valuations.
“Over the past few months, the government has implemented a host of Financials sector reforms, implementing a bankruptcy code, merging foreign direct investment (FDI) and foreign institutional investment (FII), mandatory banking under a public welfare scheme and balance sheet cleanup programs,” according to WisdomTree.
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