Even though the emerging markets have been underperforming in the global markets, there is a silver lining. India country-specific exchange traded funds have stood out.
Over the past year, the WisdomTree India Earnings Fund (NYSEArca: EPI) rose 27.0%, iShares India 50 ETF (NasdaqGM: INDY) gained 26.4% and PowerShares India Portfolio (NYSEArca: PIN) increased 26.7%. In contrast, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) returned 4.8%.
Fueling bets on India’s markets, Prime Minister Narendra Modi has enacted economic reforms, including raising limits on foreign ownership in the insurance industry and new centralized business tax code, writes Morningstar analyst Patricia Oey.
Additionally, India is fueling growth with cheap oil prices as the country is a major energy importer. Consequently, the India is enjoying a lower current account deficit and inflation, which have allowed for greater accommodative monetary policies. [Cheap Oil Market to Fuel China, India ETFs]
After Indian equities rallied over the past year, Oey argues that valuations may not be that expensive on a historical basis. For instance, EPI shows a 16.0 price-to-earnings ratio, INDY has a 20.8 P/E and PIN has a 18.9 P/E, whereas EEM shows a 12.9 P/E.
“So while the MSCI India Index (a U.S. dollar-denominated market-cap-weighted index of companies listed in India) is currently trading at a trailing 12-month price/earnings ratio of 20 times, it has traded as high as 30 times,” Oey said. “India also has a history of trading at a significant premium to the MSCI Emerging Markets Index.”
Nevertheless, there are other risks. For instance, a sudden jump in oil prices would significantly slow India’s growth. Indian equities are also prone to volatility and heavily depends on foreign investments. Any signs of weakness could cause foreigners to exit positions.
Moreover, since the India ETFs do not hedge their currency exposure, a sudden exodus of foreign investors, volatility in the Indian rupee and the current account deficit could all pull on the country’s currency and further weigh on India-related ETFs.
WisdomTree India Earnings Fund
For more information on India, visit our India category.
Max Chen contributed to this article.