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Why India ETFs Are Set for Further Rally

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Global funds boosted purchases of India equities after the government started easing restrictions. Renewed risk-on trade in global equities has seen foreigners invest more than $4 billion in local Indian shares so far this quarter, the highest in Asia.

Not only this, India ETFs have been on a tear past month on stimulus optimism despite the coronavirus threat. First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) and Columbia India Consumer ETF (INCO - Free Report) were the top performers past month with about 17.5% and 14.4% gains, respectively, whileWisdomTree India ex-State-Owned Enterprises Fund (IXSE - Free Report) gained the least (up 8.5%). This came against 10.9% gains in the S&P 500 (as of Jun 5, 2020).

Behind the Headline Numbers

Stimulus Announcement

In mid-May, India’s prime minister Narendra Modi recently announced a larger-than-expected stimulus package, which includes 20 trillion rupees ($265 billion) worth an estimated 10% of gross domestic product, per Bloomberg.

The stimulus was aimed at countering the economic fallout from the coronavirus pandemic. Director of macro strategy at Oxford Economics had estimated the economic cost of the biggest lockdown of the world at “around 6% of annual GDP.” He had believed that the fiscal boost was timely for India as valuations were cheap both historically and relative to the Asia ex-Japan peer group.

Bet on Normal Monsoon & Government Support for Rural India

If this was not enough, forecasts for a normal monsoon and the return of migrant labors to their villages should contribute to further rally in Indian consumer stocks that are more tied to the rural areas.  The rural economy makes up about 45% of gross domestic product, per Bloomberg. “The lockdown wasn’t as severe in rural India as it was in big cities. So, the farmers could harvest crops,” per an analyst.

Analysts at IDFC Securities Ltd., Centrum Broking Ltd. and Crisil Ltd. are betting big on consumer staples companies even as India is on its way to its first full-year economic contraction in more than four decades. Notably, the government’s 1.5 trillion rupees ($20 billion) package to help farmers and fishermen at the onset of monsoon is a big plus.

Monsoon showers are expected to be 100% of a long-term average, per the secretary at the Ministry of Earth Sciences. In the Indian market, excess or good rainfall is viewed as market-friendly. So, if the country receives plentiful rains along with a solid rural package, the market will have more room to run.

Investors should note that if a heavy monsoon benefits rural areas, it will give a leeway to the Reserve Bank of India (RBI) to slash interest rates in the coming days. This is because prospects of good monsoon may keep food inflation low. This can give India Investing a boost.

Laggards to Participate in Catch-Up Trade

Moreover, underperformers amid lockdowns are likely to catch up with their stronger peers, per an analyst, as the economy opens up. Hotels, restaurants and shopping malls are now allowed to operate after more than two months of lockdown.

ETFs to Play

If the government manages to deploy such mammoth stimulus efficiently, small-cap ETFs like iShares MSCI India Small-Cap ETF (SMIN - Free Report) should benefit. Notably, small-caps are highly domestic-oriented and are likely to fare better amid reopening of the economy as well as expected surge in spending in rural India. Among other ETFs, investors can consider the likes of Invesco India ETF (PIN - Free Report) and iShares India 50 ETF (INDY - Free Report) .

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