There is an easy to put into context the impact India's
plunging rupee has had on the country's equities and the ETFs
that house them. And it goes beyond the fact that $1 now buys
about 65 rupees, up from around 55 rupees at the end of last
Chew on this tidbit: There are eleven India ETFs trading in
the U.S. Excluding
the recently reverse split
Direxion Daily 3X India Shares (NYSE:
), six of the remaining 10 India ETFs are among the 10
worst-performing non-leveraged ETFs of any stripe over the past
Now This For India ETFs: JPMorgan's No Fan
The four largest ETFs, a group that includes the iPath MSCI
India ETN (NYSE:
), are down an average of 25.2 percent year-to-date. At the ETF
level, the makes India the worst performer among the major funds
the BRIC nations
. An average loss of 25.2 percent is worst than 24.8 percent
decline for the iShares MSCI Brazil Capped ETF (NYSE:
) and more than twice as worse as the loss incurred by iShares
China Large-Cap ETF (NYSE:
Back to the rupee. It trades at 64.45 at this writing. The
pain is unlikely to stop there or at 65. There is a fair chance
$1 will buy 70 rupees and do so sometime in a matter of weeks.
One significant problem for Indian assets is that currencies can
overshoot to a point of being undervalued, but remain that way
for a long a time.
"However, just as in equities, 'cheap' valuations can become
even 'cheaper; during periods of market stress. Indeed, the most
recent period has been particularly difficult, as many investors
have shunned nearly all emerging market assets in 2013,"
said WisdomTree Portfolio Manager Rick Harper in
. "Absent investment flows, increases in economic growth or a
general change in sentiment, foreign currencies and asset prices
have remained weak against a domestic equity market that has
recently touched all-time highs."
At the end of July, the rupee's purchasing power parity was
discounted to the tune of 63 percent, according to WisdomTree
data. Another way of looking at that scenario is that if two
currencies, say the U.S. dollar and Australian dollar, are in
equilibrium, a trip to Starbucks should cost relatively the same
in Sydney after greenbacks are converted to the Aussie as the
same trip to a Starbucks in Dallas.
The weak currency has put the Reserve Bank of India between a
rock and a hard place. Since late 2011, RBI has
lowered rates four times
, but now that it needs to boost rates to stem rupee outflows, it
cannot because economic growth in Asia's third-largest economy is
At the ETF level, the weak rupee causes problems. Clearly. And
the situation will get worse at 70 to a dollar. The problem comes
by way of sector distribution within these funds. That does not
mean India ETFs are poorly constructed. They are not. At the
sector level, however, only two groups - technology and health
care - truly benefit from rupee weakness.
Indian pharma companies are big exporters, so the weak rupee
helps them. Operating margins for Indian technology exporters
tend to rise 30 to 35 basis when the rupee falls 1% against the
dollar, but Indian energy, industrial, telecom and utilities
are all vulnerable to a weak rupee
The largest India ETF has a 21.6 percent combined weight to
technology and health care. However, a rival product has an
almost 20 percent weight to the sectors most vulnerable to rupee
weakness and comparable weights to those groups are seen across
India ETFs are locked in a race to the "BRIC bottom" with
their Brazilian counterparts. In an interesting twist of fate,
Brazil's government, like India'
, has hindered not helped economic progress. Central banks and
policymakers in both countries have proven less than adept at
dealing with slowing growth and faltering currencies.
Predictably, this damages investors' confidence and prompts
outflows from rupee-denominated assets, further weakening the
currency. And that explains why one marquee India ETF is trading
near its lowest levels since 2009 and another is touched an
all-time low earlier this week.
For more on ETFs, click
Disclosure: Author owns none of the securities mentioned
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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