Last year, India was identified as one of the "Fragile
Five"-countries that were most vulnerable to the beginning of the
end of the era of cheap money. With the start of taper
talk, foreign investors rushed for exits leaving Indian stocks
and the currency in a downward spiral.
The trend reversed this year with investors returning to emerging
markets as they realized that interest rates in the developed
world were not going up as earlier feared.
But that's not the only reason; there have been a number of other
positive developments in India that resulted in investors' recent
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The world's largest democracy is currently going through
multi-phase general elections and results will be known on May 16
when all rounds of polling are over. Recent opinion polls suggest
that the prospects of National Democratic Alliance (NDA) led by
BJP forming the government look pretty strong now.
BJP's prime ministerial candidate, Narendra Modi is perceived as
a reform oriented politician, who has a strong record of economic
development as the chief minister of the state of Gujarat.
Polling saw unusual enthusiasm this time with record turnout as
many voters are hopeful that the new government will be able to
reverse the trend of ballooning corruption and slowing growth.
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Another positive development on the Indian political horizon is
the emergence and rising popularity of Aam Aadmi Party (AAP)
which started as an anticorruption movement. While the new
party may get many seats in the current elections, its
contribution in making Indian voters aware of their right to
clean, transparent and honest governance has been immense.
Is the Worst Over for the Economy?
The Indian economy grew at just 5% during 2012-13 fiscal year,
lowest in a decade and much lower compared to ~8% average growth
rate achieved during 2006-11. But it appears that the growth
bottomed out during Q1 of 2013-14 fiscal year and recorded a
marginal improvement in the next two quarters.
The central bank expects a modest
to 5%-6% growth during the current fiscal year. The IMF projects
a GDP growth rate of 5.4% in 2014, followed by 6.4% in 2015.
Current account deficit has come down recently, thanks mainly to
decline in imports as the economy slowed. Gold imports also
moderated due to higher duties. Exports on the other hand
improved during the second-half of last year as the currency
However the recent currency strength has begun to impact exports.
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Monetary Policy on the Right Path
Last year, renowned economist Raghuram Rajan took over as the
governor of the central bank of India. Since his appointment the
central bank has taken a number of positive steps towards
liberalizing the financial markets and strengthening the monetary
A series of measures announced by the Reserve Bank last year to
encourage capital inflows and limit the currency downslide have
been quite successful. The Indian rupee has traded in a narrow
range of about 60 to 63 per US dollar in the last six months,
after plunging to a low of 69 to a dollar in August last year.
NDA can effectively execute its agenda only if it wins majority
and does not have to depend on smaller regional parties' support.
Further, It is difficult to predict whether Modi's Gujarat model
can be successfully replicated at the national level.
While the CPI inflation declined to a 25-month low of 8.1% in
February, it has started creeping up again mainly due to higher
food prices. A below normal monsoon
for this year may increase the upside risks to central bank's
target of 8% CPI.
The central bank raised the rates three times recently order to
tame inflation though higher rates in turn could be crimping
Indian ETFs have been among the best performers in the emerging
markets space over the last six months. Most popular India ETF
WisdomTree India Earnings Fund (
I) has jumped 14.8%, while iShares MSCI India Fund (
) and iShares India 50 ETF (
) have returned 8.4% and 11.1% respectively, compared with a
negative return of 3.6% for the broader iShares MSCI Emerging
Markets ETF (
However, the best performance has come from the ETFs focused on
smaller companies in India, with EGShares India Small Cap ETF (
) and Market Vectors India Small Cap ETF (
) surging 27.5% and 36.4% respectively. These were the ones that
were hurt the most after the taper talk.
The Bottom Line
In the past few weeks, investors have poured in a lot of money in
Indian equities in the hope that with an effective and
reform-friendly government at the center, India may again deliver
high-growth seen a few years back.
Fixing India's structural problems including chronic inflation,
wide deficits, massive corruption and crumbling infrastructure
will take many years but investors expect the new government to
show willingness to resolve these issues and lay out a clear path
for action soon.
Further with a central bank committed to keep inflation and
current account deficit on track, India's long-term outlook
certainly appears to be brightening.
But expect a big sell-off in case election outcome is not what is
being predicted and election opinion polls in India have not
really have been very accurate in the past.
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ISHARS-EMG MKT (EEM): ETF Research Reports
WISDMTR-IN EARN (EPI): ETF Research Reports
ISHARS-M INDIA (INDA): ETF Research Reports
ISHARS-SP INDIA (INDY): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
EMERG-GS INDIA (SCIN): ETF Research Reports
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