The potential of single-country investments

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Exploring opportunities in India

GOING GRANULAR can pay off. That’s true of sector-specific investing in developed markets, and it’s true of specific opportunities in emerging markets (EM). However, investors in EM often focus on broad benchmarks like the MSCI Emerging Markets Index, potentially overlooking promising opportunities in specific countries. Emerging markets are not a monolithic investment bucket anymore, if they ever were. Over the past few years, we’ve witnessed a significant shift in globalization dynamics, characterized by the rise of friend-shoring and onshoring, and a notable pullback in the Chinese economy, which has driven EM investments for almost two decades. These evolving circumstances necessitate a reimagined approach to asset management. In a special edition of the BPM Talk podcast, David Jones, director of iShares investment strategy at BlackRock, and Rohit Gupta, VP and quantitative researcher at MSCI, delved into the concept of single-country investing alongside BPM’s David Kitai. This strategy seeks to capture opportunities in specific markets while avoiding the risks associated with broader EM or regional indices. In addition to understanding the concept and utility of single-country investing, Jones and Gupta highlighted a key economy in detail: India. India is benefiting from a global shift toward diversified supply chains, presenting unique growth prospects. By tapping into the granular exposures offered by India, investors could reap benefits in both the short and long terms, capitalizing on the synergy between local developments and global forces.

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“Emerging markets are complex, with varied central bank policies, fiscal positions, and GDP compositions. Lumping them together dilutes the potential value return”

Rohit Gupta, MSCI

Gupta identifies major macroeconomic risks, including inflation, fiscal imbalances, and trade tensions. Jones emphasizes the impact of US policy on emerging markets. Many EMs depend on attracting foreign capital, often influenced by US interest rates. Even countries with strong fundamentals, like Brazil, are constrained by US policy, affecting their ability to cut rates and foster growth.

Single-country investing can be likened to slicing up a larger index pie to implement specific investment views. “It’s akin to moving from large-cap equities to large-cap technology within global equities,” explains Jones. “You can shift from regions to single countries, focusing on parts of the market that promise the most value. Emerging markets are complex, with varied central bank policies, fiscal positions, and GDP compositions. Lumping them together dilutes the potential value return.” Gupta adds, “This approach allows investors to focus on specific-country markets with favorable risk-return characteristics, especially given the current macroeconomic landscape marked by geopolitical tensions and supply-chain rewiring. Investors are

increasingly seeking international diversification, growth opportunities, and the integration of sustainable investment objectives while managing risk efficiently.” A prime example of single-country investing is the current investment climate around China and India. China, once the star of EM growth, faces significant challenges, like deflationary pressures, real estate overhangs, and geopolitical risks. Investors are cautious, often underweighting China in their portfolios. In contrast, India, with its seven-percent GDP growth and favorable fundamentals, is becoming a popular choice. “India looks like China did 15 to 20 years ago, benefiting from geopolitical fragmentation and offering promising growth opportunities,” says Jones. Gupta highlights that thematic investing and economic and sector exposures play crucial roles. For instance, MSCI Canada’s constituents derive over 50 percent of their revenues internationally, indicating significant growth opportunities beyond domestic markets.

Single-country views can be applied to portfolios to manage risk or capitalize on specific opportunities. Jones elaborates, “A trend we see is emerging markets ex-China, where investors seek broad EM returns while avoiding China-specific risks. On the flip side, countries like India and Mexico are favored for their long-term growth prospects and geopolitical stability.” The contributions of single-country diversification differ significantly between developed and emerging markets. In developed markets, factor exposures are more synchronized, whereas emerging markets exhibit more variability due to their developmental stages and economic structures. Emerging markets offer distinct factor exposures that drive performance, making small shifts in weightings significant. Gupta adds that in developed markets, style factors and industries drive return dispersion, while in emerging markets, country-specific factors dominate. Diversification across countries within emerging markets is crucial for risk management and alpha generation. Despite its potential, single-country investors could reap benefits investing carries risks.

“You can shift from regions to single countries, focusing on parts of the market that promise the most value. Emerging markets are complex, with varied central bank policies, fiscal positions, and GDP compositions”

David Jones, Blackrock

India, now the world’s largest country by population, has emerged as a prime candidate for single-country investing. From 1990 to 2019, India’s 6.5 percent annualized GDP growth outstripped other emerging markets, although it lagged behind China’s 9.3 percent. However, by 2021–22, India’s growth had surged to around eight percent, overtaking China. Gupta attributes this to several macro-structural trends. “India’s digital transformation and infrastructure development, its position as a global capability center, the realignment of global supply chains, favorable demographics, and sustainability initiatives are driving its growth,” he explains. “These trends are expected to continue following recent elections, further supporting India’s structural growth story.”

Global exchange-traded product (ETP) flows into Indian equity exposures hit a record US$6.8 billion in 2023, reflecting substantial interest from foreign investors, Jones adds. The growth of Indian domestic markets and the weighting of India in key indices like the MSCI Emerging Market Index, which has doubled to about 17 percent over the last four years, underscores this interest. Within India, sectors and industries like IT, pharmaceuticals, telecommunications, and automobiles have a significant proportion of their revenues linked to international sources. Gupta notes that the Indian IT sector, for instance, sources 94 percent of its revenues internationally, primarily from the US and Europe. Sectors with higher international revenues and a manufacturing orientation are likely beneficiaries of the globalization trend.

Unpacking single-country investing

India: A case study in single-country investing

Unpacking single-country investing

India: A case study in single-country investing

Published October 07, 2024

However, Gupta cautions about risks, including valuation premiums and market accessibility issues. Indian equities have consistently traded at a valuation premium to other EMs. Concerns about foreign ownership limits, capital inflows and outflows, market-entry regulations, and availability of investment instruments are also prevalent. Single-country investing, while not entirely new, is gaining popularity as investors seek returns from diversified sources. Understanding the structural changes and growth drivers in key markets like India can help investors better identify investment opportunities and key portfolio risks.

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India's growing at an exceptional rateAs the world’s largest country by population, India has experienced significant annualized GDP growth. Global exchange-traded product flows into Indian equity exposures hit a record $6.8 billion in 2023, while Indian domestic markets and the weighting of India in key indices like the MSCI Emerging Market Index, which has doubled to about 17 percent over the last four years, reflects substantial interest from foreign investors

Key lessons from an emerging market: India

Caution risks such as valuation premiums and market accessibilityIndian equities have consistently traded at a valuation premium to other emerging markets. The country’s foreign ownership limits, capital inflows and outflows, market-entry regulations, and availability of investment instruments should be considered when building India into an investment portfolio

Favourable macro-structural trendsIndia’s structural growth places the country in a favourable position. Digital transformation, infrastructure development, realignment of global-supply chains, and sustainability initiatives are driving growth in India. These trends are expected to continue in the upcoming years.

Single-country investing?

Focus on investment areas that offer value It allows investors to home-in on areas of the market with favourable risk-return characteristics, in contrast to the complexity of emerging markets where varied bank policies, GDP compositions, and socioeconomic factors can dilute potential returns

Balance the differences between developed and emerging markets Consider the differences in diversification between developed and emerging markets – they are significant. In developed markets, factor exposures are more synchronized, whereas emerging markets exhibit more variability due to their developmental stages and economic structures. Emerging markets offer distinct factor exposures that drive performance, making small shifts in weightings significant

in both the short and long terms by capitalizing on the synergy between local developments and global forces. For example, India is benefiting from a global shift toward diversified supply chains, presenting unique growth prospects

Benefit from global shifts that present unique growth prospects Single-country investors could reap benefits in both the short and long terms by capitalizing on the synergy between local developments and global forces. For example, India is benefiting from a global shift toward diversified supply chains, presenting unique growth prospects

Seeking opportunities in specific markets while avoiding the risks associated with broader EM or regional indices? Here are a few reasons why investors choose single-country investing.

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