Shares of the WisdomTree India Earnings Fund (NYSE:
EPI
), the largest India ETF by assets, traded higher by 1.1 percent
Tuesday after 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
non-investment grade status.
The news from Moody's could not come at a better time for
India. Already home to the worst credit rating of the four BRIC
nations, India is fighting
to keep its investment-grade rating
. The loss of that rating would lead to not only higher borrowing
costs, but a probable plunge in major India
ETFs
such as EPI and the PowerShares India Portfolio (NYSE:
PIN
).
The PowerShares India Portfolio and the iShares S&P India
Nifty 50 Index Fund (NASDAQ:
INDY
) are also trading higher on the Moody's news. PIN is up nearly
0.9 percent while INDY has gained 0.7 percent on volume that has
already surpassed the daily average.
Moody's backing of the stable outlook and India's
investment-grade status could serve to calm investor fears that
the country's departure to junk territory is imminent. Still, it
must be noted that earlier this year Standard & Poor's
lowered its outlook on India to negative from
stable
. S&P rates India's debt BBB-, the lowest investment-grade
rating on its scale. Fitch Ratings also has a BBB- rating with a
negative outlook on India, Asia's third-largest economy.
"The sovereign rating is supported by credit strengths which
include a large, diverse economy, strong GDP growth as well as
savings, and investment rates that exceed emerging market
averages," Moody's said in a report.
Conversely, the Moody's report was not entirely positive. The
ratings agency criticized India's high government deficit and
debt ratios, problems with inflation and decrepit infrastructure,
among other issues.
India's infrastructure, arguably the worst of the BRIC nations
and perhaps among the worst in the broader emerging markets
universe, was negatively displayed earlier this when
massive blackouts swept the nation
, leaving as many as 600 million citizens without
electricity.
Of the country-specific ETFs devoted to the infrastructure
sub-sector, the EGShares India Infrastructure ETF (NYSE:
INXX
) has outperformed the comparable Brazil and China funds by
surprisingly wide margins this year. However, since those three
ETFs debuted over two years ago, INXX is by far the worst
performer with a loss of nearly 31 percent.
The need for better infrastructure puts India in a bind
because it is frequently cited as a black mark on the economy,
but with the country India is grappling to keep its fiscal
deficit to 5.3 percent of GDP in a bid to keep its
investment-grade rating, increased spending may not be
forthcoming.
The bottom line is quite clear. With heavy allocations to the
country's financial services and energy sectors, EPI and INDY can
ill afford Indian debt to be rated as junk. Said differently, the
more India can do to shore up its tenuous investment-grade
rating, the better it is for India ETFs.
For more on India ETFs, click
here
.
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