Despite concerns about inflation, decrepit infrastructure and
the potential loss of the country's already tenuous
investment-grade credit ratings, Indian equities were stellar
performers in 2012.
For the year, the BSE Sensex 30 Index surged 25 percent,
outpacing the MSCI Emerging Markets Index by about six percent in
Indian equities and the corresponding
were boosted last year by an array of factors ranging from waning
inflation to government reforms aimed at increasing liquidity and
foreign investment to bullish outlooks from various banks and
For example, Goldman Sachs
forecast 6.5 percent GDP growth for Asia's
third-largest economy this year
Prior to that, Moody's Investors Service reiterated a stable
outlook on India's sovereign debt rating. Moody's also affirmed a
Baa3 credit rating for India, which is one notch
above junk status
Still, there is more to the Indian investment story and
investors may do well to look beyond purely macro catalysts.
"While the Reserve Bank of India (RBI) and the Indian
government recently have been active with reforms supportive of
economic growth, we believe it is of the utmost importance to
look beyond the purely macroeconomic story and to the valuation
landscape," WisdomTree research analyst Christopher Gannatti said
in a research note.
Gannatti points out that consumer discretionary, financial
services and industrial names returned 40 percent or more last
year and that Indian staples and health care names impressed with
sector-wide gains of 30 percent or more. Predictably, those
returns have elevated the P/E ratio on the Sensex, which is now
"Notably, there are only two sectors with P/E ratios above
20x: Consumer Staples at approximately 33x and Telecommunication
Services at approximately 27x,"
"I believe the Consumer Staples sector may be the sector
within the Sensex that is the most at risk of a potential
correction, as it is the sector with the highest expectations for
Fortunately for investors, the marquee large-cap India ETFs
are not heavily allocated to staples stocks. For example, the
WisdomTree India Earnings ETF (NYSE:
) devotes just 3.7 percent of its weight to the consumer staples
sector. Staples account for just 7.5 percent of the PowerShares
India Portfolio's (NYSE:
Still, it is worth noting that once-inexpensive Indian stocks
now command a premium relative to the broader emerging markets
space. That means Indian firms must generate earnings growth that
investors deem as satisfactory to keep meriting rich
"The MSCI Emerging Markets Index has a P/E ratio of
approximately 12.4x, while India's market cap-weighted benchmarks
were all approximately 32%-35.5% higher," Gannatti noted.
Valuations are a tad better with PIN, which currently has a
P/E ratio of 15.21 and a price-to-book ratio of
EPI is even more attractively valued. The largest India ETF by
assets had a P/E of 10.76 and a price-to-book ratio of 1.76 at
the end of the fourth quarter,
according to WisdomTree data
Year-to-date, EPI is dealing with a small loss while PIN is
higher by about two percent. That said, Indian small-caps have
shown noticeable weakness as the Market Vectors India Small-Cap
) and the EGShares India Small-Cap ETF (NYSE:
) are off 5.55 percent and 4.55 percent, respectively.
Given the elevated volatility in Indian small-caps,
conservative investors looking for exposure to the market may be
best serve by sticking with large-caps. Should Indian large-caps
lead the country's equity markets higher this year, EPI could be
the way to play that trend.
Eschewing traditional weighting methodologies, EPI's
constituents are ranked by earnings and possible new additions to
the ETF's underlying index "must demonstrate positive earnings on
a cumulative basis over the four quarters prior to the annual
Index screening date," according to Gannatti. That could play in
investors' favor if Indian stocks receive positive catalysts this
"I believe India is one of the most underappreciated and
underinvested countries of the often-cited 'BRIC' basket of
countries," said Gannatti. "Given its large population, India has
a great long-term growth story, and there are a number of
potentially positive catalysts brewing from government reforms to
monetary policies. This combination could have the potential to
positively affect equity performance."
For more on India ETFs, click
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