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Oil Dip, Building Upserge Adds Even More Reasons To Consider India ETFs

July 26, 2016 1:27 pm
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Oil Dip, Building Upserge Adds Even More Reasons To Consider India ETFs

As was recently highlighted, exchange traded funds tracking Indian equities started 2016 struggling. But in recent months, India ETFs are gaining momentum — including the $1.42 billion WisdomTree India Earnings Fund (NYSE: EPI).

WisdomTree, one the largest and oldest India ETFs, is higher by 8.2 percent over the past 90 days, compared to a gain of 4.6 percent for the MSCI Emerging Markets Index over the same period.

Investors have until now been disappointed by the slack performance by Indian stocks, because as a net oil importer, it's economy was expected to benefit from lower crude prices. That trend could be starting to change. Despite rebounding oil prices this year, they are still low enough to favorably impact the Indian economy — third-largest in Asia.

Also bolstering the case for an ETF such as WisdomTree is the improvement in India's account deficit (measure of the flow of goods, services and investments into and out of the country). Additionally, inflation, often a point of concern for investors considering India, is ebbing and other signs point to improvements within the Indian economy.

Morgan Stanley’s Head of India Research, Ridham Desai, recently told WisdomTree that Indian capital expenditures, particularly infrastructure spending, is turning for the better.

“Overall, Desai described India as experiencing a U-shaped recovery and believes it will take more than 12 months for private capex to pick up, as current capacity utilization is in the low 70 percent range. The cause of this is partially related to weak global demand for exports,” notes WisdomTree.

WisdomTree's underlying index holds the most profitable Indian companies that are accessible to foreign investors. Profitability is the key there at a time when earnings growth in emerging markets is, at best, anemic. The ETF's emphasis on profitability can also serve investors well with Indian stocks because, although the market is not currently expensive relative to its long-term averages, India often trades at a premium to broader emerging markets indexes.

“In Desai’s opinion, the Consumer Discretionary sector had favorable valuations, and cyclically near-term earnings look stronger. Finally, he thinks Industrials engaged in building infrastructure could be attractive too,” adds WisdomTree.

Consumer Discretionary and Industrials holdings combine for over 15 percent of EPI's weight. However, Financial Services, which could benefit as infrastructure companies borrow and Indian consumers take on more debt, comprises 25.1 percent of EPI — its largest sector allocation.

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