India, like many other Asian countries, is not able to rely on a large domestic natural resources base. That’s actually a clear positive, according to Heidi Heikenfeld, portfolio manager of the Oppenheimer Emerging Markets Innovators Fund (EMIAX). “Nations without a commodity base have had to think strategically to move up the value-added chain,” she says.
The Oppenheimer fund focuses on small and mid-cap firms that are benefiting from a greater entrepreneurial spark taking root in Asia these days. More than 65% of its assets are invested in technology, consumer and health-care stocks, sectors rife with innovation that are playing a growing role in local economies.
Take “biosimilar” drugs as an example. In India, China and elsewhere, drugmakers are ramping up generic versions of hard-to-synthesize biotech drugs and offering them to consumers at very competitive price points. “This results in more affordable health care in EM countries and worldwide,” says Heikenfeld. The Oppenheimer fund garners five stars from Morningstar (for its Y shares).
BlackRock’s Rodriguez says his firm is especially bullish on Indonesia these days. That country has largely missed out on the emerging market rally of recent years. The iShares MSCI Indonesia ETF (EIDO), for example, has dropped an average of 5% over the past five years. “We think growth will pick up after a recent pullback, and a significant risk premium is already built in,” Rodriguez says.
He adds that Indonesia is among the countries that stand to benefit from monetary easing (a contrast to the monetary tightening now taking place in the U.S. and other advanced economies). He thinks Russia, Brazil and Mexico will also benefit from lower interest rates, which could aid the performance of the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB). That fund, which sports a 0.4% expense ratio, tracks an index composed of U.S. dollar-denominated emerging market bonds.
Indexing Up in China
Of course, emerging country investors focused on Asia need to pay attention to the mighty role that China plays in the region, which continues to provide a solid regional economic tailwind. The IMF forecasts 6.6% growth for the Chinese economy this year.
Even though it’s now the second-largest economy in the world, it still remains vastly under-represented in global emerging market indexes and funds, says Brendan Ahern, chief investment officer at KraneShares Advisors LLC. He adds that the situation “is being rectified as various MSCI indexes are steadily adding more exposure to China’s A shares.” Those indexes (and the funds that track them) will continue to steadily add China A shares exposure over the next five years.
That should provide a boost for Chinese stocks. “MSCI indexes represent $12 trillion in assets held in passive and active funds, and as China exposure grows, fund managers will have to buy a lot more Chinese equities to maintain their benchmarks,” says Ahern. His firm offers a range of China-focused ETFs, including the KraneShares Bosera MSCI China A ETF (KBA), which, according to the firm’s literature, “is designed to track the progressive partial inclusion of A shares in the MSCI Emerging Markets Index over time.”
Debt Is Still Under-Owned