Inflation Report Brings Relief to India ETFs
With U.S. stocks getting slammed on the back of a June consumer sentiment number that missed expectations, 82.7 compared to the reading of of 84.5 economists expected, it is another "sea of red" day for emerging markets ETFs. Following some nice surprises on Thursday, emerging markets stocks look poised to close the week lower with the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) flirting with a weekly loss of 3.1 percent.
However, there is at least one bright spot Friday and the source of it is arguably surprising. Downtrodden India ETFs are showing signs of life even as investors retreat from other emerging markets funds.
Earlier Friday, India's Commerce Ministry said its wholesale price index rose 4.7 percent year-over-year in May following a 4.89 percent jump in April. That is good for a 43-month low and better than the 4.88 percent increase economists polled by Bloomberg expected.
While the funds are currently off their intraday highs, the WisdomTree India Earnings ETF (NYSE: EPI), the largest India ETF by assets, and the iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) are both trading higher.
Those ETFs and others have often shown an intimate correlation to Indian inflation data and it has previously been inflation that has prompted sharp sell-offs in equities in Asia's third-largest economy. The other side of the coin is that Indian inflation has been ebbing, giving the Reserve Bank of India room to cut interest rates, which it has done, and the May inflation data supports the notion that RBI has more room with which to pare rates in an effort to bolster the economy.
RBI has cut rates to 7.25 percent following reductions at its past three meetings. The central bank meets again Monday and that could prove to be another significant trading opportunity in EPI, INDY and other India ETFs.
Still, investors should approach India ETFs, among the more volatile emerging markets funds, with some degree of caution. EPI is down more than 10 percent in the past month, marking the official definition of a correction. INDY and the PowerShares India Portfolio (NYSE: PIN) are close to one-month declines of 10 percent as well.
That may imply the funds are oversold, which they probably are, but the wild card is the rupee. Earlier this week, India's currency hit a record low against the dollar and that was after it was already apparent the rupee was undervalued relative to the greenback.
However, and this is just to state the facts not an overly bullish view on Indian stocks or the rupee, the WisdomTree Indian Rupee Fund (NYSE: ICN) has jumped almost 2 percent this week. Take that with a grain of salt because the weekly gain will be solely attributable to ICN's bullish, light volume Friday performance. Still, when it comes to the emerging markets currencies, gains are gains at this point.
Going into next week's RBI meeting, the ETFs risk-tolerant traders may want to have a look are the EGShares India Small Cap ETF (NYSE: SCIN) and the Market Vectors India Small-Cap ETF (NYSE: SCIF). Those two ETFs are down an average of more than 14 percent in the past month, but the two offer considerable exposure to the Indian consumer story.
Despite the lower rate of overall inflation, Indian consumer prices lose 9.31 percent last month, according to Bloomberg. That could be the impetus for further rate cuts, which could give SCIN and SCIF a chance for some near-term upside.
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