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More Upside Seen For India ETFs

October 10, 2016 11:15 am
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Major India exchange-traded funds are still lagging the MSCI Emerging Markets Index on a year-to-date basis, but some market observers believe stocks in Asia's third-largest economy have the ability to play catch-up with a run that could extend into next year.

ETFs such as the iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY) and the WisdomTree India Earnings Fund (NYSE: EPI) should reward investors if Indian stocks can string together a run of out-performance over broader emerging markets equity benchmarks.

A Question Of Cost

EPI and INDY may appear expensive relative to the MSCI Emerging Markets Index, but Indian stocks currently trade at multiples that are in line with historical averages.

Valuation likely is not investors' primary concern with Indian stocks. Familiar issues such as high inflation and slow-moving government reforms are the considerations for foreign investors when mulling stakes in Indian stocks or ETFs.

Related Link: Tax Reform Could Boost India ETFs

“India's benchmark BSE Sensex index of leading shares will rise a further 5 percent by the end of this year, according to analysts polled by Reuters, driven by a stable growth outlook and on expectations the government will pass more economic reforms,” according to Reuters.

The Role Of Financials

Often one of the largest sector allocations in a plethora of diversified and single-country emerging markets ETFs, financial services names play a pivotal role in determining the fortunes of these funds. That could prove to be good news for EPI. Non-performing assets (NPAs) have been an issue for Indian banks, one that is being worked through now.

EPI'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.

“Expectations for more policy easing from the Reserve Bank of India could also boost Indian stocks, analysts said. The RBI cut interest rates five times in the 18 months to April as inflation eased to within the central bank's target,” added Reuters.

However, domestic consumption must increase as external demand is still slack. Additionally, a case can be made that, at least at the ETF level, investors are under-allocated to Indian stocks. For example, EPI and INDY have lost over $430 million in combined assets this year while the comparable Brazil ETF has added over $680 million in new assets.

EPI is up 11.7 percent year-to-date, an advantage of nearly 200 basis points over the comparable China ETF.

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