In a recent blog post, Russ Koesterich, iShares Global Chief
Investment Strategist, recommends investors underweight their
exposure to India, Asia's third-largest economy.
"I currently hold an underweight view of Indian stocks given
India's slowing growth, stubbornly high inflation, large current
account deficit and chronic budget deficit,"
Koesterich said on the iShares blog
The less-than-enthusiastic view of India is arguably
well-timed. Earlier this month, Standard & Poor's said the
"I" in the BRICS acronym is in danger of losing its investment
grade credit rating. That news followed S&P's April move to
lower its outlook on India's BBB- rating, the lowest on the
investment-grade totem pole,
to negative from stable
Koesterich points readers to a paper published earlier this
month by the BlackRock Investment Institute, which
highlights five trouble spots for the Indian
. As Koesterich notes, those red flags are:
1. Fiscal and current account deficits are hurting India's
capacity to finance growth. 2. High inflation and a weak rupee
currency limit the Reserve Bank of India's (RBI) maneuvering room
to cut interest rates, and current relatively high interest rates
put a damper on economic activity. 3. Policy-making is
slow-moving and erratic (thanks to a logjam of bills and official
probes), and the probability of much-needed reforms in the near
future is low. 4. Domestic consumption underpins India's 7%
economic growth, but there are signs it's faltering. 5. As India
is a major oil importer and is the world's No. 2 gold consumer,
the country's current account can be negatively impacted by
energy and gold prices.
India's economic woes have already punished ETF's tracking the
country. As speculation has swirled that
Indonesia could replace India as the "I" in
, India ETFs have plunged.
In the past 90 days, the WisdomTree India Earnings ETF (NYSE:
), the largest India ETF by assets, has tumbled 16 percent. The
iShares MSCI India Index Fund (BATS: INDA) has slid 13.7 percent
and the iShares S&P India Nifty 50 Index Fund (Nasdaq:
) has dropped almost 12 percent.
Small-cap ETFs tracking India have been even worse in the past
three months. The Market Vectors India Small-Cap ETF (NYSE:
) has given up 22 percent while the EGShares India Small-Cap ETF
) is over 19.2 percent.
The BlackRock Investment Institute offers words of caution and
hope regarding Indian equities. Indian "equities could dip by 10%
in the next six months if global investor sentiment sours
further," according to the paper, but the piece also says
investors that can stomach the volatility could see Indian stocks
move higher by 10 percent to 15% over the next 18 months.
It could easily be investor sentiment that drives the
performance of Indian equities over the near- to medium-term.
"As the Institute points out, India was a top-five contributor
to global growth in 2011 and it has the world's 11th largest
economy. As a result, a further faltering India would only add to
global investor anxiety and would be a negative for global
equities," Koesterich said.
For more on India ETFs, click
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.