The first half of 2017 has seen exchange-traded funds investing in stocks from developing nations as Brazil, China, India, Mexico and Russia have taken in $10.5 billion in new money. With $127.8 billion in total assets, one-twelfth of all the money in these funds has come in over the past 90 days.
Much of that, presumably, is in hot pursuit of high recent returns. Emerging markets are up by 12.4% this year — double the return of the S&P 500 index of U.S. stocks, counting dividends.
Investing in emerging markets isn’t a bad idea, but rushing to do so is. The stocks of industries in emerging markets aren’t so much absolutely cheap as relatively cheap — especially when compared to the U.S. companies, which still are hovering near all-time highs.
The MSCI EAFE, a benchmark for foreign developed markets, is expected to grow earnings 8% annually over the next five years. SPDR S&P 500 ETF (SPY), tracking the U.S., has an estimated five-year earnings growth of almost 9%; whereas the emerging markets are projected to grow earnings faster than developed markets over the next five years. Emerging Markets Index, a benchmark for emerging markets, has projected a five-year earnings growth rate of almost 10%.
The US economy is like a supertanker or a sailboat. It is not easy to turn it around and come back to where you have been in terms of prosperity. In general, Mr. Trump’s policies will fail to lift the economic growth rates significantly. US stocks, compared to emerging markets or European companies or Japanese stocks are significantly ahead of themselves. In 2017, emerging markets will outperform the US either by going down less than the US or by going up substantially more than the US. So economists essentially suggest investors avoid the US and rather invest in emerging economies including India.
Secondly, recently investors have been obsessed with growth in the United States because the Fed declared that they would essentially increase the Fed fund rates three times this year but in the US, the Treasury bond market is grossly oversold and for the next three months, we can have a rebound in US treasuries. Short-term and long term interest rates in the US are going to ease again in the next three months. You could get the 5% to 10% ups.
Lastly, the whole world seems to think that the only way the US dollar can go, is upward but some experts have their doubts. First of all, if you have a strong dollar, the trade deficit in the US and the current account deficit are likely to weaken as well as the economy. So, within the next three to six months or even now, the US dollar has become rather vulnerable against foreign currencies.
One of the disadvantages of investing in foreign equities is that you will have to forgo the tax benefits that your domestic equity investments get. In India, long-term capital gains are tax-free. However, capital gains from foreign equities are taxed like debt instruments, that is, long-term capital gains are taxed at 20 per cent with indexation and 10 per cent without indexation. Short-term capital gains are taxed at the normal rate of income tax. Indexation is adjusting the purchase price with inflation. It reduces real capital gains and, hence, the tax liability.
US equity markets are one of the most developed in the world and offer an opportunity to invest in some of the most respected global companies. Investing in the country’s equity market can offer a good geographic diversification to the investors’ portfolios.
Investors, however, should be aware of the local economic and political risks, tax laws as well as currency market trends before taking the plunge.
The Goods and Service Tax or as commonly known as the GST was implemented in India on July 1, 2017. The Constitution Amendment Bill replaced the existing multiple indirect taxes with uniform GST across India, as the indirect tax structure was considered as a major hurdle in India’s economic growth and competitiveness.
According to Indian Finance Minister Arun Jaitley, the implementation of GST will boost GDP by 1–2% in 2017. The consumption growth and fiscal reforms are expected to drive economic growth in 2017, according to the Asian Development Bank (or ADB) report. The improved consumer confidence is expected to attract more foreign direct investment in India as well as domestic investments in capital markets. The small-cap and consumer-related ETFs are expected to rise, as the consumer growth is directly linked to the domestic economy.
Authored by Mr. Alireza Moghhadam, Chairman, AMIDT Group