Are Investors Under Allocated to India?

Global Chief Investment Officer
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India has the world’s second-largest population1 and one of the best long-term economic growth rates of all emerging market countries.2 India also has an educated workforce and seems to embrace all forms of technology—with, notably, about twice as many cell phone subscribers as there are people in the United States. But with India being one of the so-called BRIC countries, we have to ask: Are investors potentially under-allocating? We believe they are. Our Assets-Under-Management (AUM) Figures We have reviewed all the listed ETFs in U.S. exchanges to determine ETFs focused on tracking the performance of equity market indexes specific to single emerging market countries. Throughout this piece, we’ll reference AUM in the following format: (“EM Country” AUM) for clarity, and this represents the total assets in U.S. exchange-listed ETFs tracking equity indexes of that country (data source: Bloomberg, as of March 31, 2013). We also limit our study to the top 10 countries by AUM, based on the MSCI classification of 21 emerging markets.  
Top 10: Assets Tracking Emerging Market Single-Country Equity Indexes
       • Brazil & China: China AUM is by far the highest, followed by Brazil AUM. After Brazil, there is quite a drop-off.      • South Korea & Mexico: These countries are not part of BRIC, but the asset picture indicates significant      interest. Both are ahead of the other two BRIC country AUMs, India and Russia. Based on Economic Size and Growth Potential, Investors Appear Under-Allocated to India One metric that suggests investors are under-weight: the relative size of the various economies.  
Gross Domestic Product (GDP) by Country in Both U.S. Dollars & According to Purchasing Power Parity (PPP) Exchange Rates
       • On a PPP basis, India is the second-largest economy behind China and third-largest economy with GDP      measured in U.S. dollars.      • The large difference between India’s GDP in U.S. dollar terms versus PPP terms illustrates the potential for      India’s currency to appreciate over time. It doesn’t necessarily imply immediate or significant appreciation of      India’s currency, but we believe differences in PPP value of a currency is a sign of the currency’s undervalued      nature.      • India, Russia and Brazil are very similarly sized on a USD GDP basis. However, Brazil AUM is about five times      the size of Russia AUM and about three times the size of India AUM. Based on economic size, it makes sense that China AUM ranks first—it’s the largest economy on this list by a significant margin, whichever exchange rate measurement is used. However, what makes less sense to us (again, just looking at the GDP data) is that South Korea and Mexico AUM are larger than India AUM and that the margin between Brazil AUM and India AUM is so great. Economic Growth Admittedly, absolute economic size is only part of the story. The potential for growth of those economies also is important.      • India Ranks Fourth: Of the countries included within our analysis, India exhibits the fourth-highest GDP      growth rate based on International Monetary Fund estimates for 2013. This places it ahead of Brazil, South      Korea and Mexico. In fact, by this metric, South Korea and Mexico are ranked 9th and 10th, respectively. Conclusion By these metrics, it intuitively makes sense that China ranks first in total assets among emerging market countries. However, after China, the allocation discussion becomes murky, when looking at economic size and growth. The size and growth potential of these economies do not show why Brazil, South Korea, or Mexico would have significantly more assets under management than India. In our next blog, we’ll discuss the potential of risk, returns and diversification in offering further explanation for these AUM rankings. Read our full research here.     1Source: CIA World Factbook, July 2013 Population Estimate. 2Source: International Monetary Fund, World Economic Outlook, October 2012.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focusing on a single sector and/or smaller companies generally experience greater price volatility. Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation, intervention and political developments.

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About the Contributor
Global Chief Investment Officer
Follow Jeremy Schwartz

Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.