By Christian Magoon
CEO, Magoon Capital
India ETF products and the markets they track finished negative on the week as internal economic data showed India's growth rate slowing in the 4th quarter of 2011, worries over oil prices climbed and divestment of a state owned oil company was met with lukewarm results. The two largest India ETFs, Wisdomtree's EPI and PowerShares' PIN were down more than 2% for the week but still have gains of well over 20% for the year.
Indian GDP growth for the 4th quarter of 2011 was reported at 6.1%, considerably less than 3rd quarter of 2011's 6.9% rate. Although most investors were expecting a lower number based off the poor conditions in the last few months of 2011, the number came in a bit lower than expected. According to Bloomberg the consensus estimate for 2011 4th quarter GDP growth was 6.3%. A weaker rupee, inflation and high interest rates were cited as reasons for the decline in growth.
Adding to bear sentiment were two other developments. The rise in oil prices, 11% in the last few weeks to about $123 a barrel, is a tax on Indian economic growth at a time when the country does not need it. India imports over 80% of its oil with more than 10% of total imports coming from Iran. In addition, the divestment of state owned oil company - ONGC - did not go well. This concerned markets as the Indian government is planning on a state owned company divestment strategy as a way to narrow its budget deficit.
Although GDP, oil prices and the weak divestment factors troubled the markets, the bright spot from last week appears to be a fast forwarding in the timing of Indian interest rate cuts. A weaker GDP growth number has put more pressure on the Reserve Bank of India (RBI) to cut rates sooner and deeper as it now appears clear that inflation is a less likely risk when compared to declining overall Indian economic growth. The RBI's next review of interest rates is March 15th. Comments from the Bank have acknowledged the need for rate cuts but have also expressed concern about cuts at a time with fiscal deficits looming. Investment firms like Credit Suisse have gone on record forecasting a 25bp rate cut in March and a 125bp cut for all of 2012. India's current interest rate stands at 8.5%, slightly ahead of Egypt.
Unleveraged India ETF products with material volume were down as much as 5% for the week. What is interesting to note is that despite the negative week, the leaders in performance continued to be India small cap ETF products. These ETFs, particularly SCIF and SCIN, have rebounded sharply this year after a brutal 2011. Recently iShares launched their first small cap ETF, SMIN, whose performance was right in between SCIN and SCIF for the week.
Here's a snapshot from the IndiaETFs.com Performance Grid focusing on near term performance.
Despite the second negative week in a row, India ETFs have put up substantial gains in 2012. As an example, INDY from iShares is up over 24% and is the leading the India ETF space in terms of inflows with over $110 million in new assets under management (AUM) this year. Indeed, India is one of the top performing markets in the world year to date. Despite these stellar numbers however, all unleveraged India ETFs are in negative territory - to the tune of double digits - over the last 12 months. Here's the performance grid outlining the highs and lows experienced recently.
Going forward there are a variety of factors - internal and external - that will likely drive Indian markets in the next month. Internally, interest rate policy, upcoming elections and the introduction of a new government budget should be closely watched. Ideally for India markets lower interest rates would be introduced, elections would bring a stronger group of reformers into the Indian government and the new budget would address deficit concerns in an aggressive tone.
Externally oil prices and the intensity of the EU debt crisis need to be monitored given their close relationship to India's markets. Should a conflict in Iran be avoided and an oil crisis - real or based on speculation - be averted, India should receive some wind in its economic sails. Likewise an uneventful EU debt crisis environment should continue to keep substantial foreign institutional investor inflows pouring into India.
Each one of the factors outlined above will have a significant impact on valuations within Indian markets. Given the number and similar timing of many of these developments, close monitoring over the next month is advised.