Asset TV Interview: The Case for Indian Equities

Gillian Kemmerer:

Welcome to Asset TV. I'm Gillian Kemmerer. Today we are joined by Jeremy Schwartz, Global Chief Investment Officer of WisdomTree, who will share his outlook for Indian equities and introduce us to the WisdomTree India Earnings ETF, ticker EPI. Jeremy, it's always great to have you back in the Asset TV studio.

Jeremy Schwartz:

Thanks for having me, Gillian.

Gillian Kemmerer:

Of course. So let's start with an overview of the current landscape. What are you seeing in Indian equities right now and how has this picture evolved recently?

Jeremy Schwartz:

When you go back and you think about the last decade and I think about 10 years ago, and India was a member of the Fragile Five countries. And this was a time when they had what's called sort of these twin deficits where they were spending more than they were collecting in revenue. They were importing a lot more than they were exporting. Their currency was under pressure. They had a lot of inflation, and it was a real struggle. I mean, you had both the currency and the equity markets being challenged. Today it's the leader in the emerging market. It's been booming, sort of the best population growth leading to best GDP growth. And the equities have been sort of the best in the emerging markets so really it's come a very long way. They've addressed a lot of their key issues and we see where people are moving money internationally. People say, "Why go anywhere outside the US American exceptionalism?" Well, one of the few countries taking in real money has been India. So they're seeing the macro story. They're seeing some of the other dynamics and they're going to India.

Gillian Kemmerer:

So what are some of the primary drivers for focusing on India right now?

Jeremy Schwartz:

So for right now, I'd say there's like three major forces. There's basically broad technology changes they made for the last seven, eight years that have been getting people to get more optimistic on the growth profile. There's sort of regulatory dynamics that have made it a more capitalistic-friendly place to do business. And then there's all the geopolitics and they're sort of at the center stage of capitalizing on some of the key issues between Russia, China, the Middle East. They're navigating some of those issues the best. Now you can say for the macro side, coming out later with some of these technologies, I mean, there's some things where they're doing biometric screening of their whole population. You could open a bank account with your fingerprint, right? So talk about leapfrogging technologies faster than, say, the developed world. So they're implementing some things. They went from a cash-based society with a lot of corruption, people avoiding taxes, and it was a very controversial thing where they banned large bills. But what did that mean? If you wanted to keep your large bills, you had to put it into the banks. And so that helped recapitalize the banks, but it also now means 50% of transactions are done electronically. And so that's sort of formalizing the economy. It's leading to sort of this national economy that's sort of more cohesive than all these separate states that they were doing more fragmented, implement new taxes that also helped encourage that sort of global national view versus all these states views.

So just a lot of things going to get a boost for growth, boost for productivity. It's got the biggest population, young population working, all leading to sort of better economic growth.

Gillian Kemmerer: 

So as you alluded to in the geopolitical sphere, India is navigating some of the changing tides. And one in particular that I know we've previously discussed is the fact that much of the world is stepping away from Russia, but India is not necessarily taking that stance. How have they played the evolving relationship with Russia and its resources?

Jeremy Schwartz: 

So there's Russia versus the West, but there's also China versus India versus the rest. And it's all interconnected clearly, but they are viewed as one of our main allies in Asia. So US has this main ally. They're trying to combat China's rise, and there's also a geopolitical tension with Taiwan and China, and India is viewed as one of these offsets to the rise of China. So India is a big US ally, Japan's a big US ally, but they're also then keeping Russia close and they're buying cheap Russian oil. So while the West is not buying the cheap Russian oil, when we talked about them being a Fragile Five country and having big oil imports, that was one of the pressure. They're spending a lot of money on oil. Well, now they're navigating it well by still buying the cheap Russian oil, but keeping good relations with the US.

So in a way, they've been some of the beneficiaries of all this geopolitical turmoil buying cheap oil, but being an ally of the West.

Gillian Kemmerer:

Wow, really interesting fine line to be walking. So let's drill down into the WisdomTree India Earnings Fund or ticker EPI. When did it launch?

Jeremy Schwartz:

So very interesting. It's not easy to be a first-to-market in the ETF world, but WisdomTree has been launching ETF since 2006. This was one of our 2008 vintages and so it was the first ETF to own local securities. At the time, there was a note structure that was basically an unsecured debt obligation of Barclays Bank. And this was right before the financial crisis or right as the financial crisis was starting to mature and people didn't really want to have an unsecured debt obligation. You didn't actually own the physical shares in these Indian stocks. It was hard to get access as a foreign investor. But we set up all the work to do that. Then a bunch of ETFs followed us. But yes, we've been in the market for now 16 years and so first, but we tried to make it in a very broad-based way so that could be the true benchmark for India.

Gillian Kemmerer:

So you've mentioned that obviously you have a market-leading position, but what else sets this fund apart in this space?

Jeremy Schwartz:

So when you look at the other biggest ETFs, a lot of them do follow a market cap-weighted approach. You know, WisdomTree took this idea of rebalancing the fundamentals so we use an earnings weighted approach. Now, interestingly, we are much broader. People think of the market as market cap weighted. When you look at the flagship ETFs, they are 50, 75 stocks. We have 400-plus stocks in EPI. So it is much more representative of the whole economy and markets because it has a lot of mid-caps, a lot of small caps. It's not just concentrated in, say, the big tech outsourcing firms that sort of serve the globe. Part of the excitement about India is it's a local economic story. They have 60% consumption as part of their GDP. India is not just about exporting, it's about their local economy story. So I think EPI represents that being that mid-cap, small cap, more local-type companies and sort of these global outsourcing firms.

Gillian Kemmerer:

So if we shift more to a portfolio construction standpoint, where do you think Indian equity fits into, let's say, a more traditional portfolio?

Jeremy Schwartz:

You know, it's interesting. You could think of like, well, what is neutral exposure to India? So if you took at a very, very macro level, the MSCI All Country World Index, it's now 63% US. Interestingly, the second-biggest country is Japan. We've talked about Japan, it's about 5.5%. China is now 2.5%, and India is just under two. So if you're going to own it relative to just its market cap in the world, it'd be two. In emerging markets, interestingly, China got up to almost 40% of MSCI's emerging market index not so long ago before this sort of tech crackdown. Interestingly, China's now around 23% for the broad index, and India is right at 20. So it's actually grown in emerging markets to close to 20%. Now, very interesting, one of our competitors in the industry, Jeff Gundlach from DoubleLine, a big bond manager was on CNBC recently. And he said for his own portfolio, he'd want to be 10% India, 10% Japan, some equal weighted because he thinks the markets are expensive, a lot of cash. But 10% India and Japan is sort of the key international benchmarks for not just developed world, not just the end, but 10% India is a big statement for a long-term allocation. And a lot of it is this excitement about population growth, sort of the fastest GDP, they're going to be bringing these people out of sort of the rural into the cities, upgrade their standards of living. It's going to lead to a lot of growth. 10% is a lot, but I'd say 2%, which is the world's allocation is probably too little. So somewhere between two to 10% is how I could see you allocating to a global portfolio to India.

Gillian Kemmerer:

And lastly, are there any risks in India that you're keeping an eye on for the rest of the year?

Jeremy Schwartz:

Well, we talked about some of the regulatory issues, the geopolitical issues. You know, their Prime Minister Modi has been very good for the market. He's brought this sort of pro-capitalistic state and so very pro-business mindset. He's taken on some of the tough things. Like banning the use of cash bills was a very unpopular thing and people wondered how that would play, but it's proven to be very effective. So he's been very good. So now most people think all the signs on the election show he's going to win. But you have this sort of election in the... It's not a specific date like the US. Like we know in November the date. There is sort of like a rolling-type period. You're going to get results around the May timeframe, but people think Modi's going to win. It's like 98% probability that he's going to win. But if he did not win, that would be they went to a different direction. That is one of the risks that we're watching.

Gillian Kemmerer:

Well, thank you so much for taking the time to share your outlook for India and to introduce our viewers to EPI.

Jeremy Schwartz:

Thanks so much, Gillian.

Gillian Kemmerer:

And thank you for tuning in. From our studios in New York, I'm Gillian Kemmerer for Asset TV.