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Koesterich Upgrades India to Neutral From Underweight

Koesterich Upgrades India to Neutral From Underweight

After a precipitous decline that started late in the first quarter, Indian equities and many of the corresponding ETFs have rebounded in recent weeks. The move higher has prompted at least one upgrade of Asia's third-largest economy as iShares Global Chief Investment Strategist Russ Koesterich raised his rating on India from Underweight to Neutral.

Koesterich advocated an Underweight rating on India on February 6. At the time, the call appeared early as major India ETFs including the WisdomTree India Earnings ETF (NYSE: EPI) and the iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) and others continued a torrid pace set at the start of the year, rallying into early March.

The call proved prescient as EPI and INDY have lost 11.6 percent and 7.6 percent, respectively since February 6. Indian small caps have been even worse offenders. Since February 6, the Market Vectors India Small-Cap ETF (NYSE: SCIF) has plunged 20 percent while the rival EGShares India Small Cap ETF (NYSE: SCIN) is off 12.5 percent.

The aforementioned ETFs and others tracking the "I" in BRICS have started to turn around. Now, foreigners are gobbling up Indian equities. Offshore funds purchased a net $522.1 million of Indian shares on Sept. 14, the highest level in ten weeks, Bloomberg reported, citing the Securities & Exchange Board of India.

In a blog post, Koesterich outlines several reasons for the India upgrade. He notes that India reported solid second-quarter GDP growth of 5.5 percent.

"We've also upgraded our view on India's growth," Koesterich said. "Our new forecast projects 6.4 percent annual growth in GDP, up from 6.1 percent."

Improved growth in the medium term could be buoyed by reduced diesel subsidies, looser rules on foreign ownership in India's retail sector and "aggressive growth target from India's planning commission: 8.2 percent from 2012 through 2017, surpassing the 7.9 percent target achieved over previous five years."

Loosening of investing restrictions in India's retail sectors could be a boon for ETFs such as the EGShares India Consumer ETF (NYSE: INCO). Thinly traded and often forgotten in the India ETF conversation, INCO is the only ETF focused entirely on the Indian consumer.

INCO has found a way to hold up well among the India ETF carnage. In the past six months, the fund has jumped seven percent while EPI has lost 7.4 percent. SCIF has plunged 17.4 percent over the same time.

India's macroeconomic struggles this year – inflation and slowing growth chief among them – have made the operating environment tricky for established and new ETFs alike. iShares rolled out two new India ETFs in February BEFORE Koesterich shifted his rating to Underweight. In April, Standard & Poor's lowered its outlook on India's credit rating to negative from stable. India sports a BBB- minus credit rating from S&P, the lowest investment grade rating and the lowest credit rating among the BRIC quartet.

The two new iShares India ETFs, the iShares MSCI India Index Fund (BATS: INDA) and the iShares MSCI India Small Cap Index Fund (BATS: SMIN) have attracted less than $25 million in assets under management combined. However, those INDA and SMIN have participated in the India rebound, rising 6.8 percent and 5.5 percent, respectively, over the past month.

Despite the recent ebullience surrounding India ETFs, Koesterich's Neutral rating on the country is arguably appropriate given the macro uncertainty still surrounding the country and he acknowledges in the blog post that a move to a bullish view is somewhat far off.

"High inflation, together with the weak rupee, limit the scope for future rate cuts, which could stimulate the economy," Koesterich wrote. "Fiscal and current account deficits have been persistent, and policy making is slow and at times erratic. This hinders the follow-through that we would like to see in implementing structural reforms. But in the meantime, we would now favor a neutral, or benchmark position in Indian equities."

For more on India ETFs, click here.


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