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India ETFs to Soar of Modi???s Second Term, But How Long?

Sanghamitra Saha

After a monthlong multi-phase elections, which spanned from April 11 to May 19, Prime minister Narendra Modi-led Bharatiya Janata Party (BJP) has secured the second term. More than 8,000 candidates contested for a total of 542 seats in the elections, of which 272 is the minimum number required to form the government in India.

According to the election results on May 23, BJP coalition alone will likely win around 350 seats (at the time of writing), accomplishing the 272 goal. On cues of Modi’s landslide victory, who is viewed as a market-friendly leader, India’s key equity gauges SENSEX and Nifty crossed 40,000 and 12,000 for the first time in the morning trading session.

India ETFs Are Likely to Rally

Indian stocks and ETFs scaled several highs during the past five years. The Modi government came up with several reforms while India resorted to policy easing during this period (read: 5 Years of Modi Government and How India ETFs Responded).

Among the key initiatives, tax reform or the nationwide rollout of goods-and-services tax (GST) and demonetarization deserve special mention. Also, in February 2019, Modi's government came up with an interim 2019 budget with 750 billion rupees (about $10.6 billion) in cash for farmers and solid tax cuts for payers in the lower rungs. The budget proposals lowered the tax burden for the lower middle class and thus boost consumer stocks.

But How Long Will the Rally Last?

Like many other analysts and experts, we also believe that pre-election rally in anticipation of Modi’s second-term suggests the latest victory is somewhat priced-in. In the past three months (as of May 21, 2019), iShares India 50 ETF INDY has added 10.8% versus 2.6% gains in the S&P 500. So, post-election-euphoria, investors will look for more fundamental strength.

Notably, India’s factory output shrank 0.1% in March, its lowest in 21 months. Services activity, though grew in April, was at a seven-month low, per economictimes. Consumer price inflation soared to 2.92% in April and there is also speculation that monsoon could be delayed this year. A good monsoon or rains is necessary to shore up India’s all-important agriculture sector.

“The government’s fiscal position is stretched, given the risk-to-revenue collection in the backdrop of a slowing economy,” per Nomura.  Earnings upgrade-to-downgrade ratios have been “pretty poor.”

Analysts are “worried about is continuous earnings downgrades, cautious management commentaries and weakening macro data”, which hints at the slowdown in the economy.

Bet on Small-Caps With A Near-Term View

Since small-cap stocks are more domestically-focused, funds like iShares MSCI India Small-Cap ETF SMIN, Columbia India Small Cap Fund SCIN and VanEck Vectors India Small-Cap Index ETF (SCIF) should performbetter in the near term.

Per an expert, “corporate banks, cement, capital goods, infrastructure” would fare well on Modi’s return. So, Columbia India Infrastructure Index Fund (INXX) should thus be closely-watched. These four funds have lower P/E in the pack.

Over the long-term, fundamentals, global market backdrop and oil price (if low, Indian economy gains) will rule the India market. WisdomTree India Earnings Fund (EPS) andFirst Trust India NIFTY 50 Equal Weight ETF NFTY can also be considered for the medium term due to their more compelling valuation (read: ETFs to Buy/Avoid on Higher Oil Prices).

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WisdomTree U.S. LargeCap Fund (EPS): ETF Research Reports
 
Columbia India Infrastructure ETF (INXX): ETF Research Reports
 
Columbia India Small Cap ETF (SCIN): ETF Research Reports
 
iShares MSCI India Small-Cap ETF (SMIN): ETF Research Reports
 
VanEck Vectors India Small-Cap Index ETF (SCIF): ETF Research Reports
 
First Trust India NIFTY 50 Equal Weight ETF (NFTY): ETF Research Reports
 
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