The emerging markets have been under pressure as greater volatility and political strife weigh on the category. Nevertheless, strong fundamentals should keep India’s markets and country-specific exchange traded funds on investor’s radar.
“Despite volatility in India, our assessment of the macro picture and of corporate fundamentals supports our positive long-term conviction for India’s market. We see several factors we think should support a multi-year growth cycle, including growth in consumption and public investment,” Sukumar Rajah, Senior Managing Director and Director of Portfolio Management for Franklin Templeton Emerging Markets Equity, said in a research note.
Rajah pointed out that India is a domestically oriented economy with limited export dependence. Due to its robust macro situation and strong domestic liquidity in local equities, Franklin Templeton anticipates the Indian market to be more resilient to external factors, such as all the current noise surrounding trade barriers and an escalating trade war between the U.S. and China. Looking at the Nifty 500 Index, 76% of revenues of companies were generated within India. More importantly, India’s growing middle-class population will fuel domestic consumption, which makes up 60% of India’s GDP.
The growth outlook looks positive ahead. Economic growth has accelerated and the bottom-up corporate earnings trend has strengthened. The government’s “Make in India” program is slowly turning India into a global manufacturing hub and should benefit a variety of domestic sectors.
Indian Macro Story
“The overall Indian macro story appears stable to us, with consistent positives such as steady gross domestic product (GDP) growth, rising per-capita income, increased private consumption and public investment, and improvement in high-frequency growth indicators such as stronger auto sales and cement production,” Rajah said.
Furthermore, while India’s current account deficit has widened, the government should be able to manage it, and the widening of the current account deficit can be partly explained by rising domestic demand or import demand, which may signal growth opportunities and draw foreign investments under the circumstances, supporting the balance of payments.
“Looking ahead, we believe India’s economic growth remains on a recovery path. We see signs of a GDP growth recovery after the recent softening trend tied to the disruptive effect of one-off events, such as demonetization and the implementation of the GST. Recent high-frequency indicators have confirmed a pickup in growth momentum, led by an acceleration in consumption growth, and with a notable improvement in industrial production,” Rajah added.
Investors who are interested in gaining exposure to a potential emerging growth opportunity may look to country-specific ETFs. For example, the Franklin FTSE India ETF (NYSEArca: FLIN) reflects the performance of the FTSE India Capped Index, a market-capitalization weighted index representing the performance of Indian large- and mid-capitalization stocks.
For more information on the developing economies, visit our emerging markets category.