Among emerging markets, India has been a weak performer as the country is grappling with internal and external economic threats. Economic growth slowed down to 4.8% in the last quarter and fell to a decade's low of 5% for fiscal 2013 (read: 4 ETFs on the Move After Bernanke Press Conference).
Inside the Slump: Currency Woes
This poor performance is due to a large fiscal and trade deficit, as well as persistent inflation, two situations which are plaguing growth in this emerging market. Adding to the concern is the extreme weakness in the Indian rupee.
The currency hit an all-time low this week and has depreciated 30% over the last three years against the dollar. Furthermore, the Indian currency has declined 7.4% since the start of May.
A weak currency is making imports more expensive which is in turn intensifying inflation and increasing the implicit cost of India’s high foreign debt. As such, foreign investors remain skittish about putting more capital to work in the nation, leaving many questions about the country’s economy in the near term.
Further, the phasing out of the stimulus program by the Fed would lead to fewer fund flows into the emerging markets, including India. This would put pressure on the balance of payments and in turn the domestic currency (read: 3 Emerging Market ETFs Still Going Strong).
Moreover, the country also faces significant headwinds from rating agencies like Standard and Poor’s as well as Moody’s which have warned that if the country does not keep a check on the mounting debt levels, a slowing economy, and persistent political gridlock in its capital, New Delhi, it could soon lose its investment grade status.
Many expect India to face its worst financial crisis this year in decades if the central bank fails to stop the slide in currency. Moreover, the trade deficit could widen rapidly should the European crisis deepen, thereby causing difficulty in attracting foreign capital into the nation.
Any Hope for Strong Growth Levels?
According to the recent HSBC survey – which maps manufacturing and services sectors – India expanded at a faster rate than the other three BRIC nations (Brazil, Russia and China) during the month of May (read: Two India ETFs Leading Emerging Markets Higher).
Inflation seems to be under control as it remains within the central bank's comfort zone of around 5%. Moreover, the rate of price increases is expected to cool down to 4% by August or September from 4.7% in May, assuming that the monsoon in India turns out to be favorable.
Given this, the country’s central bank has had more flexibility in terms of policy decisions. The bank has cut rates three times this year, pushing the benchmark rate down to 7.5% for the country. This would help to keep economic growth at a solid clip of 5.8% by IMF and 6.1% by World Bank for fiscal 2014.
Further, given that India isn’t a commodity-centric emerging market like Brazil or Russia, the nation has largely benefited from the recent natural resource weakness, and could continue to do so if commodities face more uncertainty in the months ahead.
Indian ETF in Focus
Given wide trade deficits and a sharp fall in rupee, Indian ETFs have been struggling this year, plunging double digits in the timeframe. However, thanks to some of the positives in terms of commodity prices and central bank flexibility, the nation could still be a decent long term pick for risk-tolerant investors.
For those seeking to tap this opportunity of beaten down prices could find the following ETFs great choices if the Indian economy improves, the currency starts stabilizing, and inflation drops to a manageable level (read: India ETFs: Back on Track?).
WisdomTree India Earning Fund (EPI)
This fund offers a broader play in Indian equities by tracking the WisdomTree India Earning Index. It is by far the largest and most popular ETF in the space, with about $845.2 million in AUM. The product holds 92 securities in its basket with moderate concentration in its top 10 holdings.
The top three firms – Reliance Industries, Oil & Natural Gas Corp. Ltd. and Infosys – collectively make up for nearly 22% of total assets. Financials takes the top spot in terms of sector exposure with one-fifth share.
The fund is bit pricey at 0.83% while volume is high, indicating no additional cost for the product. EPI is down nearly 16% year-to-date and currently has a Zacks ETF Rank of 3 or ‘Hold’ (read: Zacks ETF Rank Guide).
iShares India 50 ETF (INDY)
This ETF tracks the S&P CNX Nifty Index, a benchmark for measuring the performance of Indian equities. It has amassed $443.1 million in its asset base which is spread across 51 Indian securities and does little to reduce company-specific risk.
The fund invests nearly 58% of its total assets in the top 10 holdings with the highest allocations going towards ITC Limited, Reliance Industries and Housing Development Finance. From a sector look, bank has the top spot with 21.65% share (read: Is Trouble on the Horizon for Big Bank ETFs?).
The product is expensive charging investors 92 basis points a year in fees. INDY has lost around 11% YTD and has a Zacks ETF Rank of 3 or ‘Hold’.
PowerShares India Portfolio (PIN)
This fund follows the Indus India Index, holding 50 stocks in the basket. The top three holdings include Infosys, Reliance Industries and Oil & Natural Gas Corp. Ltd. that together make up for 30% of total assets.
In terms of sector exposure, energy and information technology occupy the top two positions with 25.75% and 17.43%, respectively. The ETF has managed assets of $343.1 million so far, and has expense ratio of 0.81%.
PIN lost over 8% in the year-to-date timeframe and currently has a Zacks ETF Rank of 2 or ‘Buy’ (read: Top Ranked India ETF in Focus—PIN).
WisdomTree Dreyfus Indian Rupee ETF (ICN)
The fund seeks to achieve total returns by providing returns equivalent to the money market rates in India and the relative appreciation of the Indian rupee versus the U.S. dollar. The product charges an expense ratio of 45 basis points and has attracted only $26.6 million in its asset base so far. Further, a low average daily volume results in a high bid-ask spread ratio for this product.
The ETF is down 3.51% in the year-to-date timeframe and has a Zacks ETF Rank of 4 or ‘Sell’ (read: 3 Currency ETFs Hit Hard By Taper Talk).
Despite several constraints, growth in India is still among the highest in the world. The Indian economy seems poised for growth in the second half of the year as the government engages in several reform measures to revitalize the economy (see more ETFs in the Zacks ETF Center).
Further, positive factors like a rising middle class and a younger population with growing spending power would result in soaring domestic consumption and in turn fuels economic growth, suggesting that the India ETF outlook—at least over the long term—isn’t as poor as you might think.
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