A day after plunging on news of a new budget that contains
surprise spending increases, India
are contending with more glum headlines on Friday.
This time it has to do with the country's already
fragile grasp on its investment-grade credit
Earlier today, Fitch Ratings said it will more than likely
downgrade Asia's third-largest economy to junk status.
"The reality is it [credit rating] is on negative outlook - so
that bias suggests it's more than likely we will downgrade - that
says it all," said Art Woo, director, sovereign ratings at Fitch
in a CNBC interview
Fitch already has India on negative outlook. Standard &
Poor's issued the same outlook on India
in April 2012
, warning at the time that India had a one-in-three chance of
losing its BBB- rating.
Predictably, potential lose of the investment-grade is not
good news for India ETFs. The WisdomTree India Earnings ETF
) and the PowerShares India Portfolio (NYSE:
) are down by 0.5 and 0.4 percent today, respectively. The
iShares S&P India Nifty 50 Index Fund (NASDAQ:
) is trading modestly higher despite the Fitch news, though that
should not be viewed as a positive sign..
In the past five trading days, INDY is off 3.82 percent. EPI
has lost 4.83 percent while PIN has tumbled 4.53 percent.
Fitch, like S&P, rates India BBB- with a negative outlook,
giving the country the worst sovereign debt rating among the four
BRIC nations. On the S&P ratings scale, BBB- with a negative
outlook means India shares company with such fiscally challenged
nations as Spain. The negative outlook for India also means
S&P has a more favorable of the BBB- ratings held by
Azerbaijan and Colombia, just to name a pair.
Hurting India and the aforementioned ETF's is Finance Minister
P Chidambaram's new budget, which calls for a
16 percent spending increase if fiscal 2013-14 to
. Oddly enough, India holds elections next year and Chidambaram
is widely believed to be a leading candidate for prime
Beyond the fact that India has been an emerging markets
laggard in 2013, a year that is already proving tough for the
broader universe of developing markets ETFs, is the notion that
markets clearly do not favor Chidambaram's plan to boost
That assertion is affirmed by the ongoing tumble of India's
small-caps. For example, the Market Vectors India Small-Cap ETF
) devotes a combine 31 percent of its weight to industrial and
materials stocks, two sectors that theoretically should benefit
from government largess. Just this week, SCIF has plunged 8.2
The rival EGShares India Small-Cap ETF (NYSE:
), which is highly exposed to industrial and consumer goods
names, looks good only by comparison to SCIF. SCIN is down almost
6.3 percent this week.
To be fair, S&P did say India's budget will not impact its
rating on the country. The other side of that coin is that
sovereign downgrades by ratings agencies are a lot like celebrity
deaths. When one happens, another one or two often quickly
follow. With the specter of a downgrade hanging India, investors
can wait for better pricing with any of the ETFs highlighted
For more on India, click
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