US investors elevate India over other emerging markets

NEW YORK - US investors, buoyed by optimism about India's economy and booming stock market, have been moving money into exchange-traded funds that focus solely on that country.

US-listed India ETFs have added about $2 billion in net new assets so far this year, outshining other emerging market funds. That brings the total assets of the 10 India ETFs tracked by Morningstar to $6.3 billion, up roughly 47 per cent since January.

Those inflows dwarf the $272 million added to broad emerging markets ETFs this year and represent the greatest single-country net asset gain when compared with US-listed ETFs that focus on Brazil, China, Russia or South Africa.

The optimism about India is largely driven by the election of Prime Minister Narendra Modi in May. Analysts and investors expect Modi's push for economic reform to rejuvenate earnings and create jobs. Investor appetite has driven the MSCI India Index up 28.5 per cent year-to-date - its highest in more than two decades.

That sentiment is a big shift from 2012, when HSBC Holdings PLC called India a "gasping elephant" in a report highlighting the country's poor economic growth.

The Organisation for Economic Cooperation and Development last week upwardly revised its growth forecast for India, to 6.6 per cent from an earlier forecast of 5.7 per cent.

"We are believers of the India story long-term," said Darshan Bhatt of New Jersey-based Glovista Investments LLC, which runs an emerging markets equity strategy for clients.

Bhatt went from having no position in India in January to having as much as 17 per cent of his portfolio in the country earlier this year. To build his Indian position, he has been selling Russian, Brazilian and South Korean shares. He has dialed back his Indian holdings a bit, he said, but still remains bullish.

India's gains stand in contrast to the 4.7 per cent gain for the Vanguard FTSE Emerging Markets ETF and the 1.6 per cent gain for the iShares MSCI Emerging Markets ETF this year.

The so-called BRICS group - Brazil, Russia, India, China and South Africa - all moved together a decade ago, but now India is pulling away from the others, said Dennis Hudachek, a senior analyst with ETF.com. The India optimism contrasts with expectations of slowing growth in China and a tepid reaction to the re-election of Brazil's president last month.

Among the biggest India ETFs, the WisdomTree India Earnings ETF is up about 35 per cent year to date, while the iShares MSCI India ETF is up 31 per cent year to date, and the PowerShares India ETF is up 29 per cent.

The WisdomTree ETF has added about $830 million in assets, while the iShares ETF has gained about $875 million and the PowerShares ETF has added about $94 million.

PRICEY VALUATIONS

While the strong US dollar has pressured global currencies this year, the Indian rupee is relatively unchanged against the US dollar since January and so far has not significantly affected US-listed India ETF returns.

Still, high valuations in the country can make the market expensive relative to other countries. The MSCI India Index has a price-to-earnings ratio of about 20, the MSCI Emerging Markets Index has a P/E ratio of about 13, and the MSCI BRIC Index has a P/E ratio of about 11.

California-based investor David Garff of Accuvest Global Advisors still sees a strong investment opportunity in India and is now "significantly overweight" in the country, moving assets from Brazil, Russia and Malaysia.

"It's one of the few places in the world where people can find growth opportunities, so they're willing to pay up for them right now," Garff said.