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Why India ETFs Failed to Catch Up with Global Market Rally

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Global markets may rally this year on a dovish Fed and cues of U.S.-China trade truce, but India markets failed to join the party. India ETFs have lost in the range of 2% to 9% this year (as of Mar 4, 2019) while all-world fund iShares MSCI ACWI ETF (ACWI - Free Report) is up 11%. Let’s find out what went wrong with India investing this year (read: Wall Street's Best Start Since 1987: Top ETFs of Top Sectors).

Election Uncertainty

The possibility of prime minister Narendra Modi losing his grip in the general election in May 2019 is acting as a headwind, per Bloombergquint. India markets gathered steam after Modi government took control in 2014 as the government rolled out a host of reformative measures.

“Any weak coalition will be bad for the markets, as it will have to manage the demands of smaller parties,” per Tata AIA’s chief investment officer, as quoted on Bloombergquint. So, investors have every reason to be concerned about India investing.

Oil Price Rally

Coming to oil prices, which have rallied this year due to the OPEC output cut deal, India has got a reason to panic. United States Oil (USO - Free Report) and United States Brent Oil (BNO - Free Report) are up more than 20% this year. Oil price is crucial for India’s economy as the country imports more than 80% of its total energy needs. This clearly explains investors’ somber outlook toward India investing (read: 5 Reasons Why Oil Saw the Best January: 5 ETF Winners).

Slowdown in GDP Growth

India’s economy grew 6.6% year over year in the fourth quarter of 2018, below a downwardly revised 7% expansion in the previous period and market expectations of 6.9%. It is the lowest growth rate in five quarters. Weak demand has been a cause for concern.

Cooling Real Estate Market

Per a source, non-performing loans are increasing at major banks and financial institutions. This has resulted in a squeeze in bank lending, cubing the growth of the property market. National house prices are forecast to increase just 1.3% this year, according to the Feb 13-Mar 1 Reuters survey of nearly 20 property market experts, per the source. This was against a 2.0% increase in the November poll.

Is There Any Silver Lining?

Of late, chances of a second term for prime minister Narendra Modi in the upcoming elections have increased. This happened after a hard stand taken by Narendra Modi against threats from Pakistan-based militants. The move, which got India’s prime minister public praises, can also present him with some electoral gains, per several analysts.

Also, a dovish Fed has resulted in nominal strength in the greenback. In fact, India’s currency has gained about 0.7% against the U.S. dollar in the past one month (as of Mar 5, 2019).Foreign institutional investors have poured a sum total of $2.27 billion over the past five sessions, per economictimes.

India ETFs

Though till Mar 4, India ETFs were under pressure and rebounded on Mar 5. Top-performing ETFs from the year-to-date look are iShares MSCI India ETF (INDA - Free Report) , Invesco India ETF (PIN - Free Report) , Franklin FTSE India ETF (FLIN - Free Report) , iShares India 50 ETF (INDY - Free Report) and WisdomTree India Earnings Fund (EPI - Free Report) (read: Oil Jumps: 4 ETFs to Benefit & 4 to Suffer).

Some of funds that saw a solid jump on Mar 5 were Columbia India Small Cap ETF (up 6.6%),Columbia India Infrastructure ETF (up 3.9%), iShares MSCI India Small-Cap ETF (SMIN - Free Report) (up 3.8%) and Columbia India Consumer ETF (INCO - Free Report) (up 2.8%).

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