Should You Buy India ETFs On Strong GDP Forecast?

Various concerns at the global level have been weighing on investor sentiments across the globe, not sparing India’s equity market. However, this did not hold back the RBI from forecasting strong economic growth in 2018.

Into the Headlines

RBI's monetary policy committee (MPC), in its first bi-monthly monetary policy review of 2018-19, maintained status quo on interest rates and strengthened GDP forecasts. The central banking authority of India kept the interest rates unchanged at 6%, in line with a Reuters poll.

Moving on, what really cheered the markets was the RBI’s trimming of inflation projections. The MPC slashed inflation projections for the April-September period to 4.7-5.1% from the previously expected 5.1-5.6%. The RBI stated that a decline in vegetable prices has led to a lower inflation forecast. However, a recovery in crude prices fuels India’s inflation woes.

Moreover, RBI’s GDP forecast also raised optimism in markets and multiple economists now expect the RBI to maintain status quo on interest rates for the near future. The RBI expects GDP growth to hit 7.3-7.4% in the first half of 2018 and 7.3-7.6% in the second half, compared with 6.6% in 2017-18.

"There are now clearer signs of revival in investment activity as reflected in the sustained expansion in capital goods production and still rising imports, albeit at a slower pace than in January," per an Economic Times article citing a statement by RBI. Moreover, the RBI is bullish on growing global demand driving Indian exports higher.

Global Risks

At a global level, the Indian economy faces certain risks. The S&P 500 witnessed a weak first quarter, as inflation and trade war fears raged havoc. As a result, market volatility increased and investor risk aversion led them to steer clear of highly volatile investments like emerging market equities.

Although the markets recovered slightly after Trump announced exemptions for most trade partners, his all-out declaration of war on China’s trade did not bode well for markets. Although markets expect the ongoing tariff threats to be mere negotiation tactics, Trump’s latest comment on China’s retaliatory action has induced fear among investors (read: China's $50B Tariff Backlash Puts These ETF Areas in Focus).

“In light of China’s unfair retaliation, I have instructed the USTR to consider whether $100 billion of additional tariffs would be appropriate under section 301 and, if so, to identify the products upon which to impose such tariffs,” Trump said in a statement.

An all-out trade war is bad news. It can lead to a higher inflationary and low growth scenario, as global supply chains will be disrupted. However, following Trump’s statement, U.S. Trade Representative Robert Lighthizer made a comment of his own, stating "No tariffs will go into effect until the respective process is complete,” calming the markets a little.

We believe, given the strong domestic economic fundamentals and possibilities of negotiations to avoid trade conflicts, the Indian economy can be a good play.

Let us now discuss a few ETFs focused on providing exposure to the emerging market nation (see all Asia-Pacific Emerging ETFs here).

iShares MSCI India ETF INDA

This fund provides exposure to large and mid-sized Indian equities.

It has AUM of $5.3 billion and charges a fee of 68 basis points a year. Financials, Information Technology and Energy are the top sectors of the fund, with 23.3%, 15.4% and 13.0% allocation, respectively. Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top holdings of the fund, with 9.3%, 8.7% and 6.7% allocation, respectively. The fund has returned 10.8% in a year.

WisdomTree India Earnings Fund (V:EPI)

This fund provides exposure to Indian equities in multiple capitalization segments.

It has AUM of $1.7 billion and charges a fee of 84 basis points a year. Financials, Information Technology and Energy are the top sectors of the fund, with 23.1%, 18.7% and 18.2% allocation, respectively. Reliance Industries Ltd, Infosys Ltd and Housing Development Finance Co are the top holdings of the fund, with 9.1%, 8.4% and 6.3% allocation, respectively. The fund has returned 10.5% in a year.

iShares India 50 ETF (JK:INDY)

This fund provides exposure to large-cap Indian equities.

It has AUM of $1.1 billion and charges a fee of 93 basis points a year. Financials, Energy and Information Technology are the top sectors of the fund, with 36.2%, 12.2% and 12.0% allocation, respectively. Reliance Industries Ltd, Housing Development Finance Co and ITC Ltd are the top holdings of the fund, with 7.7%, 7.5% and 5.5% allocation, respectively. The fund has returned 10.4% in a year.

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