Key takeaways

Investors in international markets may tend to focus broad benchmarks such as the MSCI Emerging Markets Index and as a result, may miss exciting opportunities to target specific countries. Local market trends and global forces leads us to believe that Japan and India as two such opportunities. While these countries have idiosyncratic reasons for growth, they are both benefitting from a global shift towards diversified supply chains.

Below, we dive deeper into each opportunity and highlight what is behind the growing investor interest.

Japan’s comeback

Japan ETFs have seen major inflows year to date, with over US$5.7 billion through August.¹ If this pace continues, 2023 could be the best year for Japanese ETF inflows in a decade.² In early July, the Nikkei index reached an impressive milestone, surging to its highest level in 33 years by surpassing 33,700 points.³ The MSCI Japan Index has also performed well, recording 13.6% total return year to date through August.⁴ Interest in Japan has been driven by the following:

1. Equity market reforms: The Tokyo Stock Exchange recently announced they would require companies with a price-to-book value below one to draw up capital improvement plans, with a threat of delisting if improvements are not made.⁵ Price to book value is a financial ratio that can provide insight into the relationship between a company's stock price and its book value per share. A low price to book ratio might reflect concerns about the company's profitability or future growth prospects.
2. Buffet’s bet: Famed investor and CEO of Berkshire Hathaway, Warren Buffet, visited Japan in early April 2023 to announce that he was raising his firm’s stakes in five publicly traded Japanese conglomerates. In the five days following Buffet’s announcement, overseas investors poured US$7.8 billion into Japanese equities.⁶
3. High-tech leadership: As the world actively seeks to diversify its supply chains, Japan finds itself in a favourable position to reap the benefits of this global shift. The BlackRock Investment Institute (BII) identifies geopolitical fragmentation and economic competition as a mega force reshaping the world. BII believes that industrial and protectionist policies could potentially stimulate increased investments in infrastructure and robotics.⁷ As global leaders in both industrial automation and semiconductor manufacturing equipment — key inputs to supply chain diversification — Japanese companies may see growing demand.

What’s next for Japan?

We note that while some central bank tightening should be expected, monetary policy should remain loose and supportive compared to most developed markets.⁸ Additionally, higher inflation may help move households with high cash allocations to get off the sidelines and invest into domestic equities. The average Japanese household holds just 10% of their assets in equities, compared to nearly 40% for the average U.S. household, leaving a long runway for growth (See Figure 1).

Figure 1 - Composition of household assets across the Euro area, U.S., and Japan

Source: Bank of Japan, Goldman Sachs Research, as of 1 June 2023. BoJ data as of August 2022.

India takes centre stage

India ETFs have seen a tremendous surge in interest year to date, with nearly US$2 billion of inflows through August.⁹ If this pace continues, just as with Japan, 2023 will be the best year for flows into India ETFs in over a decade.¹⁰ This surge in interest has been paralleled by strong performance; the MSCI India Small Cap Index, as an example, is up 25.9% through August, amongst the best performing single country indices in the world in 2023.¹¹ Investor interested in India has been propelled by the following:

1. Economic growth: The Indian economy is now the world’s fifth largest, recently overtaking the United Kingdom. By the end of the decade, economists believe India will be the world’s third-largest economy, behind only the U.S and China.¹² The Indian economy grew at a rate of 7.2% for the 2023 fiscal year (ended March 2023), and growth is expected to remain strong in the 2024 fiscal year, making India the fastest growing economy in the G20.¹³
2. Manufacturing opportunities: As supply chains rewire and the world looks to find a gateway to growing South Asian markets, India is well-positioned to benefit. The Indian government has taken note and is looking to increase its attractiveness as a home for manufacturing. They have introduced production-linked incentives to encourage overseas manufacturers; the initiative drew US$6.5 billion in investments during 2022.¹⁴

What’s next for India?

We believe that investors should pay close attention to India's favourable demographic trends. One of the significant mega forces identified by BII is demographic divergence. This concept suggests that specific countries will experience either substantial challenges or advantages based on their demographics. In India, the demographic outlook is exceptionally positive, as it has recently become the world's most populous nation, with a population exceeding 1.4 billion people.¹⁵ Notably, more than 970 million of these individuals fall within the prime working ages of 15-64, indicating a robust potential workforce.¹⁶

India's substantial working-age population places the nation in a favourable position to reap the advantages of a ‘demographic dividend’. This term refers to the potential for accelerated economic growth brought on by a change in the structure of a country’s population, typically characterized by declining fertility and mortality rates. The Indian middle class has now grown to 432 million people,¹⁷ a formidable group of consumers who now have discretionary income. Companies are taking note, with Apple recently announcing the opening of its first physical stores in the country.¹⁸

Figure 2 - Proportion of India's total population by broad age group, 1950-2050

Source: Economic and Social Commission for Asia and the Pacific, India demographics data, accessed on 08/18/2023

Conclusion

ETFs may help investors access international investment opportunities — whether through individual sector ETFs or individual country ETFs within the broader developed and emerging markets. Thanks to support of both local trends and global mega forces, we think investors could stand to benefit from granular exposures to Japan and India, both in the short and long-term. RBC iShares ETFs such as iShares Japan Fundamental Index ETF (CAD-Hedged) (CJP) and iShares India Index ETF (XID) are efficient investment tools helping your clients gain targeted country exposure.

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Source: BlackRock. Data as of September 30, 2023

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