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Why India ETFs Are Solid Momentum Investments?

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After a solid rally last year, India ETFs have slowed down this year. The pain was rather brutal in the small-cap space, thanks to overvaluation concerns. Columbia India Small Cap ETF SCIN is thus off 23.0% in the year-to-date frame (as of Aug 8, 2018) and the large-cap fund iShares India 50 ETF INDY has gained about 1.5%.

India ETFs Bounce Back

However, the momentum in India investing has returned. Though its central bank raised the interest rate on Aug 1 to the highest level in two years to fight inflation and stabilize the currency amid a strengthening U.S. dollar, there was no pullback in India investing. Several India ETFs hit a one-month high on Aug 1.

Per analysts, “most investors are short and this quarter’s earnings are better than expected on aggregate,” as quoted on Bloomberg. An analyst sees a group of banks and industrial stocks as likely lead the market higher.

Apart from corporate earnings growth, beaten-down price earlier in the year has made the valuation relatively appealing and pushed India ETFs higher in recent trading. Investors should note that both Nifty and Sensex — key equity gauges of India — are currently at record high.

ETF Performance

In the past one month (as of Aug 8, 2018), India ETFs have easily beaten the S&P 500-tracking fund SPDR S&P 500 ETF SPY (up 3.7%). Market Vectors Indian Rupee/USD ETN INR) (up 9.4%),Invesco India ETF PIN (up 7.9%),iShares MSCI India ETF INDA (up 7.7%), iShares India 50 ETF INDY (up 7.0%), WisdomTree India Earnings Fund EPI (up 7.0%) and Columbia India Small Cap Fund SCIN (up 8.4%) have been on a tear in the past month.

Are Stocks Still Overvalued?

Per an article published on economictimes, the recent rally in two key Indian equity indices has made shares pricier than the other emerging market peers. Indian equities’ valuation in terms of P/E has not been seen in the past two decades. India’s valuation premium to emerging markets (EM) has risen to about 62%, nearly double the two-decade average of 31%, according to Bloomberg data compiled by ETIG, as quoted on economictimes.

The article went on to explain that “India’s valuation premium over the developed market equities reached the highest since 2011. Indian equities are trading at an 18 per cent premium to the MSCI World index as compared with the long-term average of 6.49 per cent. India’s performance is in sharp contrast to the EM gauge, which is trading at the biggest discount to U.S. peers in the past 16 years.”

Why a Good Momentum Investment?

With trade war talks taking center stage this year between the United States and China and several Asian countries feeling the pressure of it, India comes across as a safe haven bet, per an analyst, due to its lower exposure to exports (read: Beyond China, These Asia ETFs to Feel the Heat of Trade War).

The average value for India’s export to GDP (during 1960 to 2016) is around 10.4% with a minimum of 3.34% in 1965 and the highest of 25.43% in 2013. Merchandise exports as a percentage of GDP for 2017-18 came in at the lowest since 2003-04 (read: Are Large-Cap India ETFs Good Bets for 2H?).

IMF noted that India now makes up, in purchasing power parity measures, 15% of the global growth, which follows China and the United States. The IMF expects the Indian economy to expand 7.3% for fiscal year 2018-19, from 6.7% in the previous year.

Still, India also has to bring down its debt level from 70.4% of the GDP in FY18. Plus, there are election risks looming. The country is due for a federal election next year. While elections bring about uncertainties in the market, election-related spending should boost spending in the economy and more domestically focused small-cap equites.

Overall, the long-term outlook is mixed for the economy. So, it is better to be part of India ETFs as long as global market trend remains the same and economic recovery lasts. 

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SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-SP INDIA (INDY): ETF Research Reports
ISHARS-M INDIA (INDA): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
WISDMTR-IN EARN (EPI): ETF Research Reports
COL-INDIA SC (SCIN): ETF Research Reports
MKT VEC-RUPEE (INR): ETF Research Reports
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