As Modi Releases Indian Budget, Profit Season Looms


India stock ETF investors have seen outsized gains this year that may stay on course if Prime Minister Narendra Modi unveils anticipated economic reforms.

But market activity has been muddled over the past few days as investors grappled with what Modi's maiden budget was likely to reveal Thursday.

Some of the recent sell-off in India ETFs can be attributed to fears that Modi's budget could focus on long-term economic revival instead of making hoped-for dramatic moves, one analyst said.

"That may disappoint some investors," said Neena Mishra, director of ETF research at Zacks Investment Research. Besides, she added, expectations for the budget are already baked into current stock prices, and "many investors, particularly shorter-term investors, are now looking for opportunities to take some profits."

While some recent news reports have said that India ETFs could get an added jolt from quarterly corporate earnings set for release starting this week, analysts who spoke to IBD were less sure.

"I'm not so positive on the shorter-term prospects for India ETFs given the huge surge already seen this year," Mishra said.

"The new budget, earnings -- I don't think these will serve as significant catalysts in the coming weeks, given the recent strong market performance," said Patricia Oey, a senior analyst with Morningstar. Like Mishra, Oey noted that optimism around Modi's potential impact on the Indian economy is already reflected in Indian stocks prices.

Good Year For India ETFs

WisdomTree India Earnings ( EPI ), the flagship India ETF with $1.7 billion in assets, has rallied 29% so far this year after declining 9% last year. Some 18% of this year's gains came in the last three months.

EPI's portfolio has an average price/forward-earnings ratio of 13.63, according to Morningstar. The price-to-book ratio is 1.84.

The top holding of EPI is Reliance Industries, with about 8% of assets. The conglomerate with interests in energy, retail and telecommunications is up 12% this year. Another top holding, State Bank of India, is up 47%.

The year-to-date leader among nonleveraged India ETFs,Market Vectors India Small-Cap ( SCIF ), has handed investors a 53% gain this year after swooning 29% last year. It has a P/E of 11.97 and a P/B of 1.22. Its top holding is Unitech International, a real estate company that is up 85% this year. Another top holding, Amtek Auto, is up 194%.

By comparison, the benchmark SPDR S&P 500 ( SPY ), which tracks the broad U.S. stock market , has risen 7% this year, following a 32% gain last year.IShares MSCI Emerging Markets ( EEM ) is up 6% this year, following on last year's 4% decline.IShares MSCI EAFE ( EFA ), which tracks developed world markets, is up 4% this year, adding to its 21% advance in 2013.

On the budget front, Mishra said investors expect the government to simplify and rationalize the complex tax regime, improve infrastructure and narrow deficits. The government would probably announce measures to widen the tax base and disinvest its holdings in some public-sector companies. Easing restrictions on foreign investments in some important sectors is also likely, she added.

"In order to revive growth and boost investments, the Modi government needs to introduce a number of critical market reforms," she said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: EPI , SCIF , SPY , EEM , EFA

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