ETFs tracking India’s stock market outpaced global markets last year and the world’s greatest democracy shows no signs of fading in 2015. The WisdomTree India Earnings Fund (NYSE:EPI) vaulted 28% in 2014. It’s smaller peer, iShares MSCI India (NYSE:INDA), jumped 22%. Foreign developed markets lagged with a 5% loss while emerging markets fell 4%. A dive in oil, a major import, that relieved a huge burden on government subsidies and economic reforms helped juice 2014’s returns. Those drivers coupled with many other catalysts will support India’s stock market this year.
1. Business-Friendly Regime and Reforms
India should attract more foreign investments thanks to a new business-friendly regime. Prime Minister Narendra Modi’s triumph in the May election ignited hope that India would soften gold import restrictions, reduce environmental regulations to better compete with China and increase infrastructure development. Modi lifted a ban in June on industrial expansion in 43 regions that the Ministry of Environment and Forests enacted in 2010. A new like-minded environmental minister took over at Modi’s choosing and stalled industrial projects have been approved quicker.
The government in November eliminated the 80:20 gold import law, which required 20% of imported gold be exported before new gold purchases could be brought in. In November, gold imports soared to 150 tons -- a fivefold leap year over year.
In late 2014, Modi issued five ordinances, similar to executive orders, to kickstart economic growth. One ordinance would let private companies mine coal while another aims to encourage foreign investments in the insurance sector. The most notable one eased land acquisition rules to cut bureaucratic gridlock that had hindered development projects amounting to almost $300 billion. A caveat is that the new ordinances have to be passed during the parliament’s upcoming meeting in February.
The government aims to provide electricity to the entire country by 2017, given that about 311 million people currently don’t have electricity. Modi is asking the government -- which controls 90% of the country’s coal reserves -- to auction its coal mines to private mining companies to increase electric production. India is estimated to have lost $68 billion in economic productivity, or 4% of GDP, in 2013 owing to power outages.
2. “Make in India” Campaign
Modi introduced in September the “Make in India” program to create jobs and increase manufacturing. The government has vowed to remove entry barriers and create a competitive tax environment to support manufacturing of low-cost goods for the foreign and domestic markets.
3. Dovish Central Bank
The Reserve Bank of India (RBI) took the global markets by surprise by slashing its key interest rate by 0.25 percentage points to 7.75%. The first rate cut in almost two years comes at time when the country is experiencing lower inflationary pressure because of lower food and oil prices. The interest rate cut will support corporate balance sheets and spur expansion, particularly in interest-rate sensitive businesses such as banking and real estate.
India’s gross domestic product will inflate by 6.4% in 2015 after surging 5.6% last year, according to the International Monetary Fund’s forecasts.
4. Inexpensive Valuations
EPI trades a price-to-earnings ratio of 14, price-to-sales of 1.1 and price-to-book value of 2. It’s trading at more expensive valuations than other emerging markets and China but is cheaper than foreign developed markets and the U.S. iShares MSCI EAFE (ARCA:EFA) has a P/E of nearly 15, P/S of 1 and P/B of 1.6. The SPDR S&P 500 ETF (ARCA:SPY) sports a P/E of 17, P/S of 1.8 and P/B of 2.5. India’s corporate earnings are forecasted to accelerate and even double over the next few years, suggesting companies should command higher valuations.
5. Massive Consumer Growth
More than 65% of India’s citizens are younger than age 35 and more than 50% are under age 25. Demographers predict by 2020, the median age in India will be 29, versus 48 for Japan and 37 for China. A younger population will drive more consumer spending as people have children and form households. On top of that, there will be more workers paying into the system for fewer retirees. Presently, home to 17.5% of the globe's population, India is on track to become the world's most populous country by 2025 with 1.396 billion inhabitants, compared to 1.394 billion for China.
In addition to having younger consumers, India’s markets are under-penetrated compared to Western markets. For example, as of 2009, only 11 per 1,000 people own automobiles in India while 440 per 1,000 own cars in the U.S. and 34 per 1,000 in China.