Government reforms have proved a catalyst for additional growth among emerging market investment strategies. India, Mexico, Indonesia and China have all turned to reforms to invigorate domestic demand and eliminate inefficiencies.
Two firms, Emerging Global Advisors (EGA), an emerging markets asset manager founded in 2008, and S&P Capital IQ have both recently expanded on two countries where they see opportunity: India and China.
Emerging Global Advisors expects countries that are actively undertaking reform — China, India, Indonesia, Mexico and Philippines — to lead growth and competitiveness in emerging and frontier markets.
Nicholas Smithie, chief investment strategist for EGA, pointed to data during a recent press event that showed reformers performed betterduring 2014. The Fab Five, aka the average return of the MSCI country indexes for China, India, Indonesia, Mexico and Philippines, had total return of 15.3%, while the MSCI EM Index had total return of -2.1%.
“The reform theme may continue to do well in 2015,” according to Smithie’s presentation. Smythie is responsible for EGA’s emerging market investment strategy.
In Indonesia, President Jokowi kept his election pledge and hiked fuel prices.
“This reduces the fiscal deficit and frees up funds for investment in infrastructure, which is positive for growth and currency strength,” according to Smithie.
Moreover, in India, similar things are happening. Smithie says Prime Minister Narendra Modi has done the same as Indonesia, which, according to him, indicates “the ability and willingness to undertake necessary economic reforms.”
And, according to S&P Capital IQ, the investor confidence in India is centered on its reform agenda.
John Krey, the international cross-asset investment analyst for S&P Capital IQ, believes the reform-minded policy climate under Modi’s Bharatiya Janata Party-led regime is likely to remain in place.
While there is currently a slow pace of deregulation and adoption of economic reforms, Krey said in a recent webinar that the market seems confident Modi will, in the near future, take the necessary steps to see reforms through fruition.
“He needs to do it and he needs to do it soon while he has the support,” Krey added. If his party fails to secure control of India’s upper house of parliament, this could slow down reform implementation, ultimately disappointing investors.
Marten Hoekstra, CEO of EGA, stressed that one way to better invest in emerging markets is to “target the reform-focused growth of India.”
Emerging Global Advisors, which Hoekstra said has “more India funds than any other ETF provider,” has a suite of Indian ETFs that target the potential growth driven by reform and lower commodity prices — EGShares India Infrastructure ETF (INXX), EGShares India Consumer ETF (INCO), and EGShares India Small Cap ETF (SCIN).
“India gets lots of attention these days,” Hoekstra said during the recent press event.
Looking at cumulative performance data of EGA’s India funds from 2012 through 2014, each of EGA’s India funds outperformed the MSCI EM Index significantly: The India consumer ETF rose 105.8%, the small-cap ETF gained 62.2%, and the India infrastructure ETF grew 24.8%, while the index rose 12.6%
Another country undertaking reform, China, is expected to post strong single-digit economic growth this year, predicts S&P Capital IQ. While Chinese Real GDP growth is forecast to recede to 7% from 7.4% in 2014, Krey does note that this growth is still much stronger than developed markets and many emerging markets, too.
According to Krey, excessive leveraging, unused productive capacity and surging labor costs should allow for continued slowing of the Chinese economy this year.
Krey also expects, as noted during the webinar, that People’s Bank of China may have plenty of room to relax credit further. But he thinks they will likely “await the announcement of the state’s 2015 budget in addition to growth targets this year and next for the domestic economy” at the next session of the National People’s Congress, which is scheduled for some time in March.
Krey also outlined some risks to China’s prospects, such as that broadening economic weaknesses could force closures of state-owned enterprises and start mounting labor strife across the nation.
“This is a very touchy political issue,” Krey said during the webinar, adding that, it “has to be addressed at People’s Congress.”
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