India ETFs are in rally mode and should weather surprise news that a much-lauded policymaker is headed for the exits.
Over the weekend, the governor of the Reserve Bank of India announced he would return to his roots in academia when his term ends on Sept. 4. Over the past three years, Raghuram "Rockstar" Rajan was credited with alleviating entrenched problems, including high inflation and bad debts. The news of his departure unsettled the markets, with some decrying Prime Minister Narendra Modi's unwillingness to extend Rajan's term by the usual two years.
Other market watchers said the news tied to Rajan, while surprising, was by no means a shock.
India is a bright spot in the world economy, and the changes wrought by Rajan will likely survive his departure and ensure continuity, said one investing expert.
"This includes adopting inflation targeting as a guide to monetary policy and the ongoing clean-up of bad loans among Indian banks," Ed Kerschner, chief investment strategist of Emerging Global Advisors, told IBD. He described Rajan's decision to leave at the end of his term as "far from a total surprise, given the amount of recent media speculation."
Kerschner added: "Of course, the choice of (Rajan's) successor will be of great importance. India's government is a reform-minded one and is likely to bring in a reform-minded replacement. The good news is that India is not short of talented economists to take over the reins of the RBI."
IShares MSCI India ( INDA ) perked up 0.7% as the broad market rallied in defiance of both the Brexit -- Britons' vote on Thursday to decide on exiting from the European Union -- and the #RRExit, as Rajan's planned departure for the University of Chicago was dubbed on social media.
INDA sits 11% below a 52-week high of 31.53 but has rallied 2.5% in Q2 through June 15. The ETF offers one of the most comprehensive exposures to Indian large caps and midcaps, covering 85% of the country's stock market.
That coverage partly explains this ETF's heady pace of growth. It holds $3.63 billion in assets, far more than its older sibling iShares India 50 ( INDY ). It displaced WisdomTree India Earnings ( EPI ) as the largest India exchange traded fund in 2015, though that rival is still more heavily traded.
India is forecast to be the fastest growing emerging market over the next five years. Its GDP growth accelerated to 7.6% in fiscal year 2016 from 7.2% the previous year, which Kerschner sees as a sign that Modi's reforms are starting to bear fruit.
He outlines three reasons why India is a unique opportunity for investors:
- It has the best demographic profile in the world, with a median population age of 27 vs. 38 in the United States. Those demographics should continue to reinforce consumption trends.
- It has made progress in reducing the current-account deficit and reviving the manufacturing sector. Political reforms under Modi continue to be a key pillar of support.
- It is tackling infrastructure bottlenecks that have historically crippled growth in the manufacturing and agricultural sectors. Spending on infrastructure projects is expected to rise from around 5% of GDP to over 8% by 2018 and beyond.
"It now takes two weeks to send something from Mumbai to Delhi," Kerschner told IBD in a phone call Friday, before news of Rajan's decision broke. "Put in a railroad, and it would take 16 hours." Modi, he added, has been aggressively attracting foreign direct investment for infrastructure and related projects.
EGShares India Consumer ( INCO ) and EGShares India Infrastructure ( INXX ) offer targeted exposure to the two niches with the best growth potential within the Indian economy, according to Kerschner. Both ETFs are fairly meager in assets and trading volume.
[ibdchart symbol="inco" type="daily" size="full" position="leftchart" ]
In Kerschner's view, challenges for India include geopolitical risks and the possibility of political reforms getting derailed if Modi loses power.
"The continuation of reforms is key to sustaining rapid economic growth ," he wrote recently.
INCO is up 1.99% year to date through June 17 vs. a 0.58% gain for iShares MSCI India. The modest recovery of Indian stocks since early March followed better-than-expected corporate earnings and expectations of a favorable monsoon season.
While Modi, the leader of the world's largest democracy, visited the U.S. earlier this month, highly rated IBD stocks of Indian companies Tata Motors (TTM) and HDFC Bank (HDB) were on the move.
Tata Motors made a 52-week high on the stock market today .