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Will India ETFs Emerge Winner in Post-Pandemic Period?

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India’s stocks have been going through the roof lately, especially the pint-sized ones. Reopening trade, stimulus optimism, government’s support to rural areas, normal monsoon (which benefits the country’s agricultural sector) and monetary policy easing have boosted confidence in India investing.

The best performers —iShares MSCI India Small-Cap ETF (SMIN - Free Report) and Columbia India Consumer ETF (INCO - Free Report) — have added about 12% and 7.5%, respectively, in the past month. In comparison, SPDR S&P 500 ETF (SPY - Free Report) has advanced about 6.9% during the same timeframe (read: Why India ETFs Are Set for Further Rally).

No wonder, investors will now be interested in knowing what lies ahead of India investing, especially since the stock market is not in tandem with economic health. Let’s delve a little deeper.

Mixed Analysts’ View on India’s GDP & Consumption

Analysts’ view is mixed on this front. McKinsey Global Institute said in a reportthatIndia’s gross domestic product (GDP) could shrink between 3% and 9% in the current fiscal year ending March 2021. The research firm added that if the government does not deal with the crisis effectively, India’s economy could expand by just 5.5% to 6.0% from 2023 to 2030.

The report by McKinsey also highlighted that the pandemic put the banking system under stress, which could result in a rise of 7-14 percentage points in bad loans in FY21. However, effective measures taken by the country’s government and central bank may decrease the number of the non-performing assets. Earlier this month, investment bank Barclays had also revised its FY21 growth projection for India downward to a contraction of 6% from a contraction of 3.2% estimated earlier, as quoted on a news report.

However, all is not gloomy. Moody's Investors Service recently said that India, China and Indonesia will be the only G-20 emerging economies to record a strong uptick in real GDP in the second half of 2020, and retained its projection of 3.1% growth contraction for India in 2020, as quoted on Business Standard. For 2021, Moody's has projected that India’s economy will expand 6.9%.

Meanwhile, the Nomura India Business Resumption Index (NIBRI) flattened at 73.4 for the week ending Aug 23, indicating a slower rebound as the post-lockdown euphoria eases. Research firm Nomura expects India’s economic recovery to be longer-than-expected.

The greenback strength and higher oil price are the two other spoilers for India investing. As lockdowns are easing globally, oil price may rebound ahead and the Fed’s denial to control yield curve as well as boost inflation should propel the U.S. dollar higher.

Any Sweet Spots?

Consumer staples and pharma sectors look to be the sturdy and less affected ones by the pandemic as these are non-cyclical in nature. India’s automotive sector may also soar as the GST Council is mulling over a tax cut on two-wheelers to boost consumer discretionary spending.

COVID-19 vaccine has the potential to be a $6 billion market in India over the next three years, per international brokerage firm Sanford C. Bernstein, quoted a news report. COVID-19 drug launches will also continue to benefit some pharma stocks. So, further rally in pharma stocks seems to be in the cards.

And some laggards of the pandemic like the banking sector may see a trade up in the coming days. Real estate stocks are also likely to benefit from lower interest rates. Notably, the Reserve Bank of India has already cut the repo rate by a total of 115 bps since February, over and above 135 bps in an easing cycle last year.

Time to Rotate Into Blue Chips?

India’s overall equity market value has gone up by about $770 billion from the March low, according to data compiled by Bloomberg, quoted a news report. Many market experts are now of the view that several Indian small caps are soaring ahead of fundamentals.

True Beacon, a top-performing Indian hedge fund, told Bloomberg lately that it has pared bullish bets and encouraged retail investors to stick with blue-chip companies, per a news report. The governor of Reserve Bank of India also warned that the buoyancy in the stock market may see a correction ahead.

ETFs to Play

Against this backdrop, it would be prudent to bet on large-cap India ETFs or the ones that have a lower P/E ratio at the current level. First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) has a P/E of 13.08X, way lower than the highest in the space of 32.02X possessed by Columbia India Consumer ETF (INCO - Free Report) .

WisdomTree India Earnings Fund (EPI - Free Report) has a P/E of 12.09X and includes large-cap stocks. iShares MSCI India ETF (INDA - Free Report) (P/E of 19.14X) and iShares India 50 ETF (INDY) (P/E 17.43X) also appear as safer large-cap bets.

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