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Are Large-Cap India ETFs Good Bets for 2H?

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After a solid rally last year, India ETFs slowed down this year. The pain was rather brutal in the small-cap space, thanks to overvaluation concerns. Columbia India Small Cap ETF is thus off 28.5% in the year-to-date frame (as of Jul 17, 2018) and the large-cap fund iShares India 50 ETF (INDY - Free Report) has lost about 1.9%.

Inside the Slowdown

Apart from corrections, there were certain factors that undermined the India ETF rally. These were rising rate worries in the United States and the resultant selloff in emerging markets and higher oil prices.

The Fed policy tightening has given a boost tothe greenback as evident from the 4.8% year-to-date rise in Invesco DB US Dollar Bullish (UUP - Free Report) . And rising dollar has weighed on the entire emerging market bloc this year.

Plus, with oil prices springing above $65/barrel despite OPEC output boost deal, India has got a reason to worry. This is because the country is a huge importer of crude. India's crude imports averaged $73.85 a barrel this June against $46.56 a year ago (read: 3 Country ETFs May Suffer as Oil Springs Higher).

Moreover, small and mid-caps have started underperforming with rising interest rates in India this year (the economy hiked repo rate by 25 bps to 6.25% on Jun 6), per UBS analysts. The group expects the trend to persis and sees a 50bp repo rate hike in fiscal 2019.

Is There a Silver Lining?

As small-and-mid-caps are guilty of overvaluation, large caps appear better bets now, at least if we go by the recent report by Morgan Stanley. The investment bank prefers banks (private corporate and retail), discretionary consumption, industrials and domestic materials.

After all, India is much better-positioned than many emerging economies. Though the International Monetary Fund (IMF) has lowered India’s growth forecast by 10 basis points to 7.3% for 2018 and by 30 basis points to 7.5% for 2019, the country still has the fastest-growing economy. Growth rates are pretty solid when compared with the expansion of 6.7% in 2017 — a year muddled with demonetization and the introduction of the goods and services tax.

Among many favorable reasons for investing in India, found out by Morgan Stanley, some were “a low and falling beta, which augurs well in a weak global equity market environment as we have seen over the past few weeks,” “a bullish steepening of the yield curve, which is at post-2010 highs and the yield curve correlates positively with stocks” and “strong macro stability evident in a positive BoP and backed by a Central Bank that is committed to keeping real rates positive.”

Against this backdrop, we highlight a few large-cap ETFs that are hovering at a one-month high. These funds returned more than 2% past month against 7.5% losses in SCIN (read: Will India ETFs Override Strong Dollar & High Oil Price?).      

iShares India 50 ETF (INDY - Free Report) — Up 2.7% in past month (as of Jul 17, 2018)

The fund tracks the Nifty 50 Index which measures the equity performance of the top 50 companies by free float market capitalization whose equity securities trade in Indian securities markets. The fund has a Zacks Rank #3 (Hold).

iShares India MSCI ETF (INDA - Free Report) – Up 2.5%

The fund looks to follow the MSCI India Index, which is designed to measure the performance of equity securities of companies whose market capitalization represents the top 85% of companies in the Indian securities market. The fund has a Zacks Rank #2 (Buy) (read: India ETFs Spike on First Rate Hike in 4 Years).

Invesco India ETF (PIN - Free Report) – Up 2.1%

The underlying Indus India Index comprises Indian equity securities traded on regulated stock exchanges in India. The fund has a Zacks Rank #3.

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