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Are India ETFs No More a Hot Investing Spot?

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After a solid rally last year, India ETFs have slowed down in 2018. The pain was rather brutal in the small-cap space, thanks to overvaluation concerns. Small-cap ETFs like VanEck Vectors India Small-Cap Index ETF (SCIF - Free Report) andColumbia India Small Cap Fund have lost about 30% this year.

Policy tightening by the Fed and the resultant rise in the greenback, the contagion of the selloffs in Turkey and Argentina that basically dealt a blow to the entire emerging market bloc, and an upswing in oil prices went against India investing in recent times.

There has been a 4.9% 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. India’s currency rupee is trading at an all-time low against the U.S. dollar. It has lost more than 13% of its value against the U.S. dollar. An India economist at Capital Economics expects the rupee's fall will continue into 2019.

Coming to oil prices, which are moving around $70/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 oil import bill jumped 52% to $11.83 billion in August. Oil price is crucial for the Indian economy as the country imports more than 80% of its total energy needs (read: 3 Country ETFs May Suffer as Oil Springs Higher).

September has been specifically downbeat for the India market. India ETFs lost in the range of 4.3% to 8.8% in the past four weeks (as of Sep 18, 2018).

Goldman Tapered its View on India

Goldman Sachs, which was overweight on India since March 2014, has sidelined India investing in 2018 and curtailed its investment view to marketweight from overweight earlier. Rich valuations, a likely slowdown in economic growth and general election next year may cause disruption in the future movements of equities, according to Goldman Sachs’ analysts.

The foreign currency reserves of India's central bank dipped below $400 billion for the first time since November 2017. The central bank has also hiked its interest rates twice this year. And if currency woes and rise in inflation continue, more rate hikes are likely to be in the cards. This in turn could thwart India’s winning growth momentum.

Is There a Silver Lining?

With trade war talks taking center stage this year between the United States and China, and several Asian countries feeling the pressure of it, India comes across as a safe haven bet, per an analyst, due to its lower exposure to exports (read: Beyond China, These Asia ETFs to Feel the Heat of Trade War).

While Goldman is skittish about India’s growth, Investment bank Morgan Stanley is bullish on it. Morgan Stanley sees India’s stocks moving higher over the next two years. Morgan Stanley believes that there will be a meaningful improvement in earnings for the corporate banks ahead. The agency thinks all of oil and trade tensions are currently priced in. Morgan Stanley analysts last week beefed up their Sep 2019 target for the Sensex to 42,000, thanks to likely earnings growth. That marks 10% gains from Friday’s close.

ETFs in Focus

Against this backdrop, below we highlight a few India ETFs that have lost the least in the past four weeks (as of Sep 19). These are Columbia India Infrastructure Index Fund , WisdomTree India Earnings Fund (EPI - Free Report) , Invesco India ETF (PIN - Free Report) , iShares MSCI India ETF (INDA - Free Report) and iShares India 50 ETF (INDY - Free Report) . These funds retreated in the range of 3.9% to 5.1% in the past four weeks.

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