Can India ETFs Rebound in 2014? - ETF News And Commentary
December 17 2013 - 12:03PM
Zacks
The surprise “No Taper”
decision by the Fed in its September policy brought in the much
needed respite for many emerging nations. Indian markets have
gained more than 6.5% in the last three months.
More recently, election euphoria in Asia’s third largest economy
pushed its stock market index - Nifty- to an all time high of 6415
last week. The impressive performance in the recent elections in
four states by the Bharatiya Janata Party--perceived to be more
pro-business than the current ruling party Congress—resulted in the
bullish trend.,.
A few other factors also supported the surge. The rupee, which
touched a record low of around 69 per dollar during the month of
August, has bounced back 10% during the past three months. Below we
have listed some of the other drivers for this rally. (read: Buy
These High Beta ETFs For a Santa Claus Rally)
Hot Money Inflow
Foreign Institutional Investors (FII) have again started to pour
funds in the emerging economies in search of higher returns. Since
the beginning of September, FIIs have bought a massive $5.5 billion
of Indian equity after pulling out $3.61 billion from June to
August.
This massive inflow of cheap money after Fed decided to keep its
monthly bond-buying program intact enabled the emerging equity
markets to revive, pushing them higher.
Boost in Foreign Reserves
The new Reserve Bank of India’s (RBI) Governor Dr. Raghuram Rajan
took some crucial measures to arrest the slide in the rupee and
boost the country’s foreign exchange reserves.
RBI liberalized its financial markets to attract more foreign
investors by making it convenient for Indian banks to borrow from
overseas and by offering programs to lure overseas Indians to put
their money in local bank deposits.
These measures enhanced India’s foreign exchange reserves to $291.3
billion for the month of November from $282.9 billion in the
preceding month, representing a third consecutive monthly rise.
Positive Economic Indicators
India’s manufacturing activities are slowly getting back on track.
The HSBC Manufacturing Purchasing Managers’ Index (PMI) rose to
51.3 in November, the highest level since March. Importantly, any
climb above 50 indicates that the economy is expanding. (read: 3
ETFs to Profit from the Manufacturing Upswing)
Exports for November rose 5.86%, while imports fell 16.37%. This
positive data narrowed India’s trade deficit. Moreover, falling
crude prices also provided some relief to India’s import bill.
Market Impact
The positive economic indicators and the election euphoria pushed
the Indian ETFs northwards in the last one month. The
Market Vectors India Small-Cap ETF (SCIF) surged
around 8% in the last month, while the iShares India
50 (INDY) and PowerShares India (PIN)
increased around 7% and 5% respectively. (read: India Small Cap
ETFs Back on Track?)
Moreover, the brake on Fed taper helped SCIF to gain around 15%
over the last three months, while INDY gained 10% and PIN added 7%
over the same time frame.
Also, all the 11 Indian ETFs delivered positive returns in the
preceding month. However most of these ETFs are still in the
negative terrotory if we look at the year-to-date time frame.
Forthcoming Events and Other Factors
Easy money policies in the developed countries have played a major
role in the equities’ bull run. Though the Fed
deferred its decision with the taper program, a chain of favorable
economic reports published of late suggests that the U.S. economy
is gaining strength. The capital goods and the manufacturing sector
in the U.S. are picking up. Moreover, unemployment rate fell to a
5-year low of 7%.
These positive economic data might prompt Fed to start tapering
sooner than later. As the Indian markets are majorly driven by
FIIs, Indian ETFs might be impacted by Fed's decision to wind down
its asset purchases
Apart from taper worries, India’s inflation still remains above
RBI’s comfort zone, which might prompt it to hike interest rates in
its next mid-quarterly review on Dec 18. The hike in rates might
dampen investor sentiment in the short term.
Moreover, the general election, scheduled to be held next year,
might also play a vital role in determining the direction of Indian
equities. Even if the existing government's failure to come to
power proves to be a blessing for investors, they should remember
that any economic recovery overnight is well-nigh impossible.
Bottom Line
Even though taper concerns are looming large over emerging
economies like India, market experts believe that India is better
poised now to tackle with the QE taper. The falling current account
deficits have somewhat eased concerns about financing India’s
current account deficit. (read: Taper Concerns Put Focus on
Homebuilder ETFs)
Nevertheless, with markets at all time high, investors having India
ETFs in their portfolio should be a little cautious for the next
few months.
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ISHARS-SP INDIA (INDY): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
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