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India ETFs to Gain Ahead on Huge Stimulus?

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India’s prime minister Narendra Modi recently announced a larger-than-expected stimulus package, which includes20 trillion rupees ($265 billion) worth an estimated 10% of gross domestic product, per Bloomberg.

The stimulus is aimed at countering the economic fallout from the coronavirus pandemic. Director of macro strategy at Oxford Economics estimates the economic cost of lockdown at “around 6% of annual GDP.” He believes that “the fiscal boost has come at an opportune time for India as valuations are cheap both historically and relative to the Asia ex-Japan peer group.”

The fat stimulus should boost investor confidence in India’s stock market and provide support to the ailing currency, according to early reaction from a number of market participants, as quoted on Bloomberg. 

“While all these measures to boost domestic capacity is [are] welcome, there could be a more explicit protectionist bent on the trade front in the near term as India shapes up to be more self-reliant,” per India economists at Citigroup Inc.

Market Reaction

Benchmark sovereign bonds in India fell the most in more than three years on proposed increased borrowing by 54% to make up for revenues lost due to the virus-induced slowdown. On May 13, the India 10-year benchmark government bond had a 6.098% yield. On the other hand, the key equity gauge the S&P BSE Sensex index of shares jumped the most in two weeks, after the announcement.

Any Risk to the Euphoria?

The head of economics and strategy at Mizuho Bank Ltd. in Singapore indicated that “it is [still] unclear if this [the huge fiscal stimulus] includes the already announced RBI credit/liquidity measures worth some 2.5% of GDP.”

India chief economist at Deutsche Bank AG noted  that “the 10% of GDP economic package is inclusive of the various liquidity measures announced by RBI earlier and the previous fiscal package announced on 26th March (0.8% of GDP); so we need to see what the incremental package size is excluding the support from earlier measures.”

How to Play With ETFs?

Overall, we believe that India investing will likely get a boost from the announcement. India ETFs have lost in the range of 18.8% to 31.5% this year. The least-hurt ETF of this year is Invesco India ETF (PIN - Free Report) and the most-hurt is VanEck Vectors India Growth Leaders ETF (GLIN - Free Report) .

As for as valuation is concerned, PIN trades at 21.60x of P/E, which is the third-highest in the India ETF space. So, the fund has more room to run. Among other funds, one can bet on iShares India 50 ETF (INDY - Free Report) , which is down 25.6% this year and has a P/E of 20.88x. First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) appears a good bet with a P/E of 19.47x and year-to-date losses of 22.89%.

If the government manages to deploy such mammoth stimulus efficiently, the growth fund GLIN should recoil, as should small-cap ETFs like iShares MSCI India Small-Cap ETF (SMIN - Free Report) . Notably, small-caps are highly domestic-oriented and are likely to fare better amid partial reopening of the economy.

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