Last year, exchange traded funds holding Indian equities were the darlings of the emerging markets space. This year, those leaders have turned into laggards even as Asia’s third-largest economy has expanded at its quickest pace in four years.
However, potential investors shouldn’t grow too optimistic with the higher gross domestic product figures as the latest output numbers were helped by a controversial update to India’s official GDP-estimation methodology, which could have bolstered recent readings by over two percentage points. Slack earnings and uncertainty regarding taxes on foreign investors are among the issues that have recently hindered Indian stocks. [Living Large With a Leveraged India ETF]
Year-to-date, the WisdomTree India Earnings Fund (NYSEArca: EPI) and the PowerShares India Portfolio (NYSEArca: PIN), two of the largest India ETFs, are off 6.1% and 2.7%, respectively. The iShares India 50 ETF (NasdaqGM: INDY), a proxy for India’s CNX Nifty Index, which is home to India’s 50 largest stocks, is lower by 5.1%. Inability to build on last year’s gains means EPI and PIN could go another year with closing higher in two consecutive years, something the funds have not done since 2009 and 2010.
“In the context of the broader emerging-markets asset class, India has meaningfully underperformed so far this year, down -4% compared with the MSCI Emerging Markets Index, which has gained +3% in U.S. dollar terms. The key point here is that if you are going to be short an emerging market for ‘a trade’, then it makes sense for you go after the weakest one at the moment,” said Rareview Macro founder Neil Azous in a recent note.
Azous also notes that the Nifty Index, home to companies such as Infosys (NasdaqGS: INFY) and HDFC Bank (NYSE: HDB), is technically weak and will soon make a death cross where its 50-day moving average crosses below its 200-day line.
Local investors in India have poured money into mutual funds for 13 straight months, according to Azous, and their U.S. counterparts have followed suit. Heartened by lower oil prices and rate cuts by the Reserve Bank of India, investors have poured a combined $769.4 million into EPI, INDY and PIN this year.
Crude oil prices could remain depressed as the Organization of Petroleum Exporting Countries maintains its high output in an attempt to price out high-margin producers, such as those in the U.S., from the market. Additionally, the oil boom in the U.S. could keep growing as improvements in drilling technology helped offset spending cuts. India is one of the world’s largest oil importers. [Capture Overseas Opportunities with These ETFs]
CNX Nifty Index
Charts Courtesy: Neil Azous, Rareview Macro