It's been one year since the pro-growth government led by Narendra Modi has taken charge of India. During this phase, the Indian stock markets experienced a roller coaster ride with piles of foreign investments made in the beginning and a correction taking place in the latter part on a number of issues.
India ETFs surged about 30% last year, though most of gains were washed out this year making the market an average performer from the last one-year look, barring a few exceptions. Let's take a look at what we gained and lost from the India market during this one-year frame.
Leaders: Stellar GDP & Rate Cut
The economy expanded 7.3% in 2014-15 versus 6.9% in 2013-14, indicating that the Indian economy is taking root. Though the growth touched a four-year high, it fell short off the Bloomberg estimate of 7.4%. Sectors like manufacturing, utilities and construction took the center stage during the last fiscal. However, the growth (7.5%) was astral in the fourth quarter as it beat even the Bloomberg estimate of 7.3%.
The main driver of this growth was the drastic decline in inflation helped by the incredible plunge in global oil prices and a stable currency despite the ascent of the greenback. This made it easier for the Reserve Bank of India (RBI) to slash interest rates thrice this year with the latest being a 25 bps cut in repo rate on June 2. However, since the third cut was expected, we do not expect any major move in the India stocks and ETFs going forward.
Laggards: Weak Corporate Earnings, Political Deadlock, MAT Issues
India's corporate earnings growth was soft in recent quarters. Weak consumption demand (private consumption was down to 59.7% of GDP in Q4 from 61.1% in Q3) and lower investments are deemed to be the culprits. As per Financial Express, 'corporate India posted its worst results in several years'. Like many analysts, we also believe that the major share of this stellar GDP should be attributed to lower oil prices.
After all, India is heavily reliant on imports to meet its energy requirements. So, a massive drop in oil prices last year came as a boon to the economy and saved India's significant foreign exchanges.
Despite Prime Minister Modi's earnest effort to reduce excessive red tape, intricate political gridlock is not helping the case. Several proposed reform plans including the land acquisition bill and the goods & service tax bill are stuck in the upper house of the parliament of India.
Plus, a few days back, Indian tax officials demanded Minimum Alternate Tax on capital gains over previous years from foreign institutional investors (FIIs). This step added to the dour sentiments over India investing.
If this was not enough, RBI cut India's growth forecast for fiscal 2015-16 from 7.8% to 7.6% on monsoon deficiency that wrecked havoc on the agricultural sector and a turnaround in global oil prices which might lead to higher inflation.
ETF Winners in Last One year
Despite this mixed environment, a few ETFs pleased investors the most with outsized returns. Below, we have highlighted three best performing India ETFs during Modi's first year of the power.
EGShares India Consumer ETF (NYSEARCA:INCO)
This ETF targets the consumer industry of India. It holds 30 stocks in its basket and has amassed about $74 million. The fund has an expense ratio of 0.89%. The product is a bit concentrated on the top 10 firms accounting for more than half of the portfolio.
Within the consumer sector, automobiles and parts occupy the top position with about one-third of the portfolio while personal goods and industrial engineering round off the next two places at respectively 26.1% and 15.2%. INCO has gained over 29% over the past one-year period and over 6% so far this year (as of June 1, 2015).
iShares MSCI India Small Cap Index Fund (BATS:SMIN)
This product provides exposure to the small-cap segment of the broad Indian stock market by tracking the MSCI India Small Cap Index. Holding 215 securities in its basket, it is widely spread out across number of securities with none holding more than 2.81% of assets.
Financials takes the top spot with one-fifth share followed by industrial (17.8%), consumer discretionary (16.4%), and materials (8.6%). The fund has been able to manage assets worth $72 million. Expense ratio came in at 0.74%. SMIN is up 3% this year and advanced around 18% in the last one year.
iShares India 50 ETF (NASDAQ:INDY)
INDY is a large cap centric fund that follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. As the fund tracks the key Indian stock market gauge, it should be an eye-catcher for foreign investors. The ETF has amassed $975 million in assets. The fund charges 94 bps in fees.
The ETF is heavy on Banks (24.1%) followed by Computer Software (14.66%). It has moderate company-specific concentration risks. This fund was up nearly 10% in the last one year and has added 1.6% in the year-to-date frame (as of June 1, 2015).
Investors had high hopes on India ETFs. Not that all their optimism was futile as the country gifted them with an impressive GDP and banked on policy easing, but the growth story is not free of loopholes. There are several things yet to be done, and some bottlenecks are still to be freed up.
Moreover, one of the main drivers of India's recent prosperity i.e., low oil price might have bottomed out and will not prove as favorable for the country as it did in 2014. This will put pressure on inflation and currency devaluation. To add salt to the wound, the Fed is due for a rate hike sometime this year taking another toll on the whole emerging market pack including India.
Investors should note that following RBI's third rate cut and a lowering of growth projections, almost all India ETFs shed gains on June 2. So, India may be the best of the BRICs now, but it has its own set of concerns. Investors should keep this in mind before entering the Indian market.