EPI WisdomTree India Earnings Fund

The Indian economy, at one time a favorite of foreign investors, witnessed a rough patch after the Fed set the taper-talk in motion. Weakening currency almost thwarted the country’s motion a few months back. 
 
However, the scenario took a surprising turn after the Fed’s ‘taper hold’ decision in late September which sent Indian stocks rallying. A deluge of measures taken by the new RBI Governor, improving fundamentals, rebound in rupee and the foreign capital inflows were held responsible for this bull run. The Sensex Index hit an all-time high of 21,294 in early November as foreign investment in September and October reached as high as $3.5 billion.
                                                                       
If this was not enough, Goldman Sachs’ (GS) upgrade of its rating on Indian equities to ‘marketweight’ from ‘underweight’ added another reason to be a little more optimistic on the nation. Goldman Sachs also upped its target for the NIFTY benchmark to 6,900 by 2014-end indicating about 9% upside in this Indian index from the current level.
 
Goldman is the third major brokerage to have a relatively positive stance on the Indian market. Japanese brokerage firm Nomura recently raised its Sensex target to 22,000 from 20,000 for 2014 and Deutsche Bank upgraded its Sensex target for 2013 to 22,000 from 21,000.
 
What’s Behind Goldman’s Optimism?
 
This brokerage firm mainly changed its view on Asia’s third largest economy on improved investor sentiment. Improving corporate earnings, easing pressure on external capital account and signs of recovery in cyclical sectors were attributed to this upgrade.
 
Also, some credit goes to an anticipated political change in India. The general election in India is due next year and the market expects Narendra Modi – the opposition candidate for the post of prime minister – to take the baton for India in 2014.
 
The market has perceived Mr. Modi’s nomination as business-friendly and growth-oriented which is why foreign investments are flocking to India with the NIFTY adding about 30% in USD terms from the lows prevailing at August-end.
 
However, Goldman Sachs ruled out the charge of political bias in its report labeled “Modi-fying our View: Raise India to Marketweight” and said market opinion was the sole driver of the upgrade.
 
This global investment bank also lifted its 2014 EPS growth forecast for India from 8% to 11% and believes that valuations for mid-cap Indian stocks are trading at a 30% discount to the broader market.
 
ETF Impact
 
Most of India-based funds performed negatively in the last six months while all of these saw decent returns, shedding all losses within the last three months period. The Goldman news might act as another driver for a number of funds in the India equity space and could be the ones to watch for in the coming days:
 
WishdomTree India Earnings ETF (EPI)

This ETF tracks the WisdomTree India Earnings Index and has amassed $1.03 billion in its asset base.  Of the total portfolio consisting of 170 Indian securities, the fund invests nearly 44% of its total assets in the top 10 holdings.
 
The fund charges investors 83 basis points a year in fees. EPI has gained around 13% in the last three months ended November 6, 2013 and currently has a Zacks ETF Rank of 3 or ‘Hold’.
 
iShares India 50 ETF (INDY)

This ETF tracks the S&P CNX Nifty Index and has amassed $438.3 million in its asset base, which is spread across 51 Indian securities. The fund invests more than 57% of its total assets in the top 10 holdings and is pretty expensive in the emerging market space, charging investors 93 basis points a year in fees.
 
INDY has added around 10% over the last three-month period and has a Zacks ETF Rank of 3 or ‘Hold’.

PowerShares India Portfolio (PIN)
 
This fund follows the Indus India Index, holding 50 stocks in the basket. The ETF has managed assets of $374.5 million so far, and has an expense ratio of 0.81%. PIN also returned over 9% in the year-to-date time frame.
 
Bottom Line

One change – that of Raghuram Rajan’s appointment as RBI’s governor – and one potential change – Modi’s nomination for the position of prime minister – in addition to inflows seem to have boosted India’s capital market growth in the near past.

However, on the downside, Purchasing Managers' Index or PMI for services and manufacturing sectors in India have been below the threshold limit for three months in a row in October. On the other hand, the country is plagued with sky-high inflation and the central bank RBI kept on increasing the repo rate to contain it. 
 
After a 25 bps hike in September, RBI resorted to another hike of 25 bps to 7.75% in late October which is a well-explained threat to the country’s industrial output (read: India ETFs After the Surprise Rate Hike). 

Given this, though recent trends are certainly encouraging, we take a cautiously optimistic stance on Indian markets. India needs some more time, and some more measures to reach even close to its previous glory of 8% growth rate. As for now, risk-tolerant investors who think Indian concerns are bottoming out might consider the above-mentioned ETFs, though volatility does look to be high.  

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WISDMTR-IN EARN (EPI): ETF Research Reports
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
ISHARS-SP INDIA (INDY): ETF Research Reports
 
PWRSH-INDIA POR (PIN): ETF Research Reports
 
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