India ETFs may not have done as well as the global market early this year but the space picked up, showcasing the best rally globally last month. India’s stock market hit a record high in early April, marking its first in seven months. FIIs have injected more than $8.4 billion into Indian stocks so far this year — the highest for Asia. India is the first among markets valued at more than $1 trillion to hit a high this year (read: Top ETF Stories of March).
Global investment banks such as BNP Paribas as well as Goldman Sachs recently upgraded India to ‘Overweight’ citing attractive valuations, continuity of flows, recovery in earnings trajectory and election hopes at the Centre. Goldman Sachs expects earnings to grow 16% this year, highest in the region.
Let’s discuss the tailwinds in details.
Election Hopes & Monetary Policy Easing
There has been a wave of optimism about the re-election of India’s prime minister Narendra Modi’s party in May. India stocks started rallying on such expectations as Modi’s government is viewed as market-friendly.
Also, on Apr 4, the Reserve Bank of India decided to cut repo rate by 25 basis points (bps) to 6%. Such policy easing should boost India equities in the coming days.
The Fed has hinted at taking a patient stance toward the rate outlook citing growth worries. This should keep a check on the greenback strength this year and help promote investments in emerging economies like India (read: Rate Sensitive ETFs to Explode Higher Post Fed Minutes).
In February, Modi's government came up with an interim 2019 budget with 750 billion rupees (about $10.6 billion) in cash for farmers and solid tax cuts for payers in the lower rungs, to appease key voters ahead of a general election. The budget proposals lowered the tax burden for the lower middle class, by exempting people earning up to 500,000 rupees from the previous cap of 250,000 rupees. The consumer ETF Columbia India Consumer ETF (INCO - Free Report) should benefit the maximum from the 2019-2020 budget.
Solid Growth Story
The Asian Development Bank has predicted India’s GDP growth at 7.2% for 2019-20 and 7.3% for 2020-21, rebounding from two years of declining growth. Higher domestic demand should also drive India’s GDP this year and the next. Per IMF data in October 2018, the Indian economy has a stronger real GDP growth outlook than the emerging economies bloc, developed economies and the global economy.
Anything to Fret About?
Having said that, we would like to note that India ETFs normally underperform if oil prices rally. This is because India is almost entirely dependent on imports for its oil needs. Since United States Oil (USO - Free Report) and United States Brent Oil (BNO - Free Report) are up more than 25% this year, India ETFs have a reason to worry.
ETFs in Focus
In the past week (as of Apr 3, 2019), ETFs like First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) , Columbia India Infrastructure Index Fund (INXX - Free Report) , WisdomTree India Earnings Fund (EPI - Free Report) , iShares MSCI India ETF (INDA - Free Report) and Columbia India Consumer ETF (INCO - Free Report) returned 1.02% to 2.0% (see all Asia-Pacific (Emerging) ETFs here).
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