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Why India ETFs Appear All Set for Further Rally

Global investors boosted purchases of India equities after the government started easing restrictions and vaccines started being rolled out. This made India's stock market the seventh biggest in the world as total market capitalization jumped to $2.7 trillion. Foreign investors have injected about $4.05 billion in the India equities this year, marking the second-best inflow among emerging markets after Brazil which raked in about $4.5 billion.

India's stock market is now bigger than Canada, Germany and Saudi Arabia, per the Economic Times, as quoted on Times Now. The market is on its way to beat France to win the sixth-biggest position in the world. Total market capitalization of France is currently $2.86 trillion.Only two European countries — France and the United Kingdom — currently have places in the top seven markets.

The BSE Sensex of India crossed the 51,000 mark on Feb 5 while the NSE benchmark Nifty topped the 15,000 level for the first time. The benchmark Nifty has gained 6.9% so far this year. India's stock market also became the second-best performer among the top 15 countries this year. iShares India 50 ETF INDY has added about 6.8% past month compared with 5.5% gains in the emerging market ETF EEM and 2.2% advancement in the S&P 500.

Rally Could Extend Further

India’s economy is poised for faster growth ahead. The latest IMF projections indicate that India’s growth will recoil sharply to 11.5% in FY22 and 6.8% in FY23. On Feb 1, the government of India announced increased spending on infrastructure in its budget, which is a tailwind for economic growth.

A Wall Street Journal article indicated that “a sustained revival will largely depend on a successful vaccine rollout, the chances of which are helped by India’s huge vaccine-manufacturing capacity. The government’s goal is to vaccinate 300 million people—out of a total population of 1.3 billion—by the middle of the year.”

Also, favorable demographics and rising middle-income population have been driving economic growth, according to several fund managers. Jeff Spiegel, U.S. head of iShares megatrend and international ETFs, also pointed out that a good diversification is a plus for the India equities as these stocks hold relatively less correlation with the S&P 500 and other emerging market economies, as quoted on Wall Street Journal. 

Along with other fund houses, we too believe that easy money policy is another plus for the India equities. The Reserve Bank of India kept its benchmark repurchase rate at 4% during its February meeting. The accommodative stance was to boost the economy that was hit by the COVID-19 crisis. Meanwhile, the central bank revised its inflation forecast downward to 5% from 5.2% in H1 of FY 2021-22 and 4.3% for Q3 of FY 2021-22. Meanwhile, real GDP growth is projected at 10.5% in 2021-22 — in the range of 26.2% to 8.3% in H1 and 6% in Q3.

ETFs to Play

If vaccine rollouts and government’s efforts to boost the economy take shape fast, one can bet on India ETFs to make the most of further rally. Small-cap ETFs like iShares MSCI India Small-Cap ETF SMIN should benefit. Notably, small caps are highly domestic-oriented and are likely to fare better amid the reopening of the economy as well as the expected surge in spending in rural India.

Large caps are also poised to grow. One may take a look at the trending ETFs like iShares India 50 ETF INDY, First Trust India NIFTY 50 Equal Weight ETF NFTY, Nifty India Financials ETF INDF and WisdomTree India Earnings Fund EPI.

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iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
 
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