As measured by some of the marquee exchange-traded funds listed in New York, Indian stocks have been, to this point in 2015, disappointments. The WisdomTree India Earnings Fund (ETF) EPI, a $1.78 billion ETF, is off 5.8 percent year-to-date.
Arguably, EPI's showing and those of rival India ETFs should be far better. After all, Asia's third-largest economy is a major oil importer and, by some estimates, Indian economic growth is outpacing that of archrival China.
Still, EPI's 5.8 percent year-to-date loss is better than the comparable China ETF and far superior to the 31.2 percent shed by the iShares MSCI Brazil Index (ETF) EWZ. Additionally, EPI has outperformed the Vanguard Emerging Markets Stock Index Fd VWO by 250 basis points.
Among the four major ETFs tracking BRIC economies, only the Market Vector Russia ETF Trust RSX has outperformed EPI this year.
India ETFs' Catalysts
Perhaps the strongest catalyst for EPI and rival India ETFs is the Reserve Bank of India (RBI), arguably the most effective central bank in the developing world. That effectiveness is borne out by the strength of India's currency, the rupee. The WisdomTree Indian Rupee Strategy Fund ICN is up almost 2.1 percent this year. That is nearly five times the gain sported by the Market Vectors-Renminbi/USD ETN CNY. ICN's Brazilian counterpart, the WisdomTree Brazilian Real Strategy Fund BZF, has plunged more than 31 percent.
In late September, RBI cut interest rates by a more-than-expected 50 basis points, marking the fourth consecutive meeting at which the central bank pared rates. EPI has reacted in kind, jumping 6.5 percent over the past two weeks.
“RBI has already been intervening in FX markets to stabilize the rupee within a broad band and has repeatedly communicated its intent to continue doing so. As a result of these factors continuing its outperforming streak of 2014, the rupee continues to beat the broad MSCI EMerging Markets Currency Index so far this year (the rupee is -3.5 percent on a year-to-date basis while the EM Currency Index is -6.1),” said WisdomTree in a recent note.
A Closer Look At EPI
EPI's leverage to the Indian consumer is more than adequate, as consumer discretionary and staples names combine for over 13 percent of the ETF's weight. The ETF's underlying index holds the most profitable Indian companies that are accessible to foreign investors. Profitability is the key there at a time when emerging markets earnings growth is, at best, anemic.
"Financials are a key sector in India, accounting for about 6 percent of its $2.5 trillion economy, with commercial banking underpinning growth in this sector. Within hours of RBI cutting rates, India’s largest bank, the State Bank of India (SBI), was first to trim down its lending rates, bringing them down by 40 bps. ICICI bank, India’s largest private sector bank, followed suit by cutting its lending rates by 35 bps. It’s important to note that SBI and ICICI are regional behemoths, and combined they have assets close to $500 billion, or about 26 percent of market share in deposits and loans,” added WisdomTree.
That is good for EPI, an ETF that devotes 25.5 percent of its weight to financial services, the fund's largest sector weight by about 675 basis points.
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