Single-country exchange traded funds tracking India, Asia’s third-largest economy, are among the most downtrodden emerging markets funds this year. In a year that has been savagely unkind to emerging markets ETFs, India funds standout and not in positive fashion.
Once a high-growth, high-octane market, the “I” in the popular BRIC acronym has been under siege this year on multiple fronts. Negative catalysts that have plagued India ETFs, such as the WisdomTree India Earnings ETF (NYSEArca: EPI) and the PowerShares India ETF (NYSEArca: PIN), include an ongoing battle with inflation, speculation of a sovereign debt downgrade and a sagging rupee. [India ETFs on Shaky Footing on Weakening Rupee]
Compounding the woes for Indian equities and ETFs is the view by some outsiders that bankers and policymakers there have been ineffective in their responses to India’s economic woes. Interestingly, foreign investors, for the most part, have stuck by Indian stocks. As of late August year-to-date inflows to Indian shares resided at $11.8 billion. [India Fund Flows Tell Diverging Stories]
There are other glimmers of hope for India ETFs, including a contracting current account deficit. Barclays estimates the current account deficit will narrow to $68 billion this fiscal year, lower than the average of $83 billion over the previous two years, Reuters reported. A jump in exports helped India pare the account deficit to $12.3 billion in July, below the monthly average of $16 billion in 2012-13, according to Reuters.
New Reserve Bank of India Raghuram Rajan, former chief economist of the International Monetary Fund, is promising short-term changes to get the Indian economy back on the right track. Rajan stated that existing banks would be able to open new domestic branches without RBI go-ahead and that new banking licenses would be issued by January. The RBI will also issue inflation-indexed savings certificates and encourage low-income financial services. Additionally, he promised to improve bad loan recovery
That is significant to India ETFs because many are heavy on financial services names. Financials at 21.1% are the largest sector weight in EPI. PIN has a 12.4% weight to that sector.
A new central bank leader and one month of lower account deficits are positive anecdotes, but conflicting views remain about the veracity of a recovery in India ETFs. Major global banks from Citibank to Goldman Sachs to HSBC have recently downgraded their views on India. On the other hand, the $15.6 billion Templeton Asian Growth Fund managed by Mark Mobius boosted its exposure to India to 16.75% at the end of July from 15.6% at the end of last year, according to Reuters.
PowerShares India Portfolio
ETF Trends editorial team contributed to this post.