India ETFs Are Hot, But May Be Overbought
Investing in India has been quite rewarding to investors in the past year and is likely to remain that way as the country’s relatively new political and economic leaders continue to inspire high hopes that growth in the world’s biggest democracy will be robust for years to come.
The election of Prime Minister Narendra Modi early this year and the naming a year ago of Raghuram Rajan as the Reserve Bank of India’s new governor together amounted to a one-two punch that has helped stabilize India’s rupee currency and breathe serious life into India’s stock market following a sharp sell-off in 2013.
That sell-off was unleashed by former Federal Reserve Chairman Ben Bernanke’s “tapering” comments about the end of quantitative easing. With the Fed just about finished with tapering that QE, and turning its attention at this week’s policy meeting to framing when it might begin to actually increase short-term interest rates, one wonders if the rally in Indian equities might be about to hit a wall.
But for now, Indian equities—as measured by the iShares MSIC India ETF (INDA | C-92)—are up almost 25 this year, compared with less than 6.5 percent for the broadly focused iShares MSCI Emerging Markets ETF (EEM | B-100). INDA has assets of $1.47 billion, or almost twice what it had only four months ago.
Double-Edged Sword
INDA’s asset increase is a combination of the rise in INDA’s price and powerful inflows—$766 million so far this year, according to ETF.com’s Flows Tool. Those variables speak, on the one hand, to the growing popularity of India-focused strategies. But those flows and price appreciation are also indications that perhaps investors ought to be worried that Indian equities may be overbought.
“Over the medium term, we continue to believe that in India there are very good opportunities for earnings growth, and valuations are not extremely expensive,” said Darshan Bhatt, co-chief investment officer at Glovista Investments, an ETF-only advisory firm based in Jersey City, N.J. “It’s a country within emerging markets that we believe is positioned well for the next 10 to 15 years.
“But in the immediate term, the markets have run up extremely high. There are high expectations for the new government, and you have to give them some time to deliver some reform measures,” he added.
Bhatt is hardly alone in his cautionary approach. Brendan Fitzsimmons, head strategist at Medley Global Advisors, a New York-based global macro research and advisory firm, shared the same view in a recent interview with ETF.com’s “Alpha Think Tank.” He argued that India has a promising longer-term story, but near-term perils are likely, if not inevitable.
Chart courtesy of StockCharts.com
Many India ETFs To Choose From
Bhatt’s firm expresses its view on India using INDA, largely because it uses an MSCI index. MSCI is a popular choice for benchmarking and calibrating weighting relative to the benchmark. Indeed, the mother index that underlies the iShares fund “EEM,” the MSCI Emerging Markets Index, is the benchmark investors talk about when they discuss the emerging markets segment as a whole.
Glovista also uses the $2 billion WisdomTree India Earnings Fund (EPI | C-72), a fundamentally focused fund that overweights firms with strong earnings. Bhatt is attracted to the WisdomTree fund because of that earnings tilt, and it appears the idea is working out just now. It’s the blue line above, and has risen more than 30 percent so far this year. INDA, with a 25 percent gain, is the red line.
INDA and EPI are the two largest India-focused ETFs on the market by assets, as ETF.com’s Segment Report on India makes clear, but there are 11 in total—an indication of how much potential fund sponsors see in India’s investment markets.
Among those 11 India funds is the iShares India 50 ETF (INDY | D-72), a $685 million fund that’s favored by Accuvest Global Advisors, an equity-only Walnut Creek, Calif.-based advisory firm that organizes asset-allocation decisions around a constellation of shifting single-country ETFs that are chosen and weighted based on a four-screen rubric featuring fundamentals, momentum, risk and valuation.
“We like the weighting INDY has to financials, but more specifically the exposure to private banks, which is about 10 percentage points greater than any other India ETF,” said David Allen, a portfolio manager at Accuvest. INDY is the green line in the chart above, and has climbed 28 percent this year.
“If you’re looking for a country with strong fundamentals, India is a great place to look—you’ve got advancing leading OECD indicators; you’ve got high internal growth; you’ve got high return on equity. So it really looks like a strong growth story,” he noted.
Warning Signs
However, investors like Allen and Bhatt as well as analysts like Medley's Fitzsimmons stress that valuations do look a bit high, even though India’s economy is likely to flourish in the coming years.
As noted, investors may need to brace for the effects that Fed rate increases could wreak on emerging markets and Indian equities. If capital flows heading to the U.S. start accelerating as investors look to capitalize on variables such as rising bond yields, asset prices in India are likely to get caught in a global downdraft.
Allen at Accuvest noted that prices of credit default swaps (CDS) on sovereign Indian debt have risen in the past few months, an indication that investors are beginning to express worry about India.
Buying Opportunity?
But given the structural reforms afoot in the world’s second-most-populous country, any pullback will quite likely end up being an attractive buying opportunity.
“If there were to be a hiccup in the broader global equity story, either into the end of the quarter or into the end of the year, India would be at risk of being sold,” Medley’s Fitzsimmons told ETF.com. “But if you're looking beyond the end of the year, through next year and over the next couple of years, provided that Modi is able to move from concept to action, it’s still a positive story.”
