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India ETFs in Focus on Union Budget Release

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India’s finance minister delivered his government’s fifth and last union budget on Feb 1. The budget’s primary talking points were in line with expectations.

Modi’s state election victories in 2017 were mainly driven by urban voter population.  Considering Modi’s re-election campaign in 2019, the budget was primarily focused on improving the conditions of rural areas and the farmer population (read: What Lies Ahead for India ETFs?).       

Into the Headlines

Jaitley has promised to make the living conditions of farmers better. Given that around 58% of India’s rural population depends on agriculture for their livelihood and that the sector contributes around 17% to India’s GDP, it is expected to majorly impact the Indian economy. The budget seeks to generate 50% returns over cost of production for farmers, by increasing the price at which the government buys the produce from farmers.

It has also announced that it plans to spend $218.1 billion (INR 14,000 billion) on rural infrastructure, in turn creating jobs and adding to the welfare of rural population. Agriculture-focused companies could benefit from this move. “The agricultural and rural landscape were in some kind of distress and provision of over Rs14.34 lakh crore to be spent on rural infrastructure should also add to the employment generation especially in the farm sector,” per Assocham president Sandeep Jajodia.

The equity markets were not that convinced, as the much anticipated reduction in corporate tax rate was not present. Although the tax rate is to fall to 25% from 30% for companies with annual revenues of less than $39 million (INR 2.5 billion), it wasn’t a major factor driving markets. Per a Bloomberg article, the smallest company in the Nifty 50 benchmark index has annual revenues of INR 64 billion.

In another shock to investors, Jaitley announced the return of the long-term capital gains tax. Stocks and bonds sold after a one-year period will be subject to a 10% charge on profits. Multiple analysts believe that this might have a negative impact on the country’s economic scenario, as it will take a toll on foreign investments.

In a blow to crypto-enthusiasts, Jaitley announced a clampdown on cryptocurrency in Budget 2018. “The government does not recognize cryptocurrency as legal tender or coin and will take all measures to eliminate the use of these cryptoassets in financing illegitimate activities or as part of the payments system,” Jaitley said. This potentially added to Bitcoin’s troubles in an already poor start to 2018.  

Economic Scenario

Coming to the economic data points, India’s GDP grew 6.3% year over year in the July-September quarter of 2017 compared with a three-year low of 5.7% in the previous quarter. However, Morgan Stanley is very optimistic about the Indian economy going forward, as it published a new research report stating that the Indian economy is expected to grow an average 7.3% between 2020 and 2022.

Let us now discuss a few ETFs focused on providing exposure to the emerging market nation (see all Asia-Pacific Emerging ETFs here).

iShares MSCI India ETF (INDA - Free Report)     

This fund provides exposure to large and mid-sized Indian equities.

It has AUM of $5.8 billion and charges a fee of 68 basis points a year. Financials, Computer-Software and Consumer Discretionary are the top three sectors of the fund, with 23.6%, 13.9% and 12.4% allocation, respectively (as of Jan 31, 2018). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.5%, 8.0% and 6.4% allocation, respectively (as of Jan 31, 2018). The fund has returned 29.3% in a year. INDA has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

WisdomTree India Earnings Fund (EPI - Free Report)

This fund provides exposure to Indian equities in multiple capitalization segments.

It has AUM of $1.8 billion and charges a fee of 84 basis points a year. Financials, Energy and Information Technology are the top three sectors of the fund, with 23.7%, 18.6% and 17.9% allocation, respectively (as of Feb 1, 2018). Reliance Industries Ltd, Infosys Ltd and Housing Development Finance Co are the top three holdings of the fund, with 8.9%, 7.8% and 6.4% allocation, respectively (as of Feb 1, 2018). The fund has returned 32.7% in a year. EPI has a Zacks ETF Rank #1, with a Medium risk outlook.

iShares India 50 ETF (INDY - Free Report)

This fund provides exposure to large-cap Indian equities.

It has AUM of $1.3 billion and charges a fee of 93 basis points a year. Banks, Computer-Software and Refineries/Marketing are the top three sectors of the fund, with 27.0%, 11.2% and 10.4% allocation, respectively (as of Jan 31, 2018). Reliance Industries Ltd, Housing Development Finance Co and ITC Ltd are the top three holdings of the fund, with 7.8%, 7.4% and 5.4% allocation, respectively (as of Jan 31, 2018). The fund has returned 29.7% in a year. INDY has a Zacks ETF Rank #1, with a Medium risk outlook.

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