U.S. investors elevate India over other emerging markets

[November 25, 2014] By Ashley Lau

NEW YORK (Reuters) - U.S. 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.

U.S.-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 percent 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 U.S.-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 percent 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 Organization for Economic Cooperation and Development last week upwardly revised its growth forecast for India, to 6.6 percent from an earlier forecast of 5.7 percent.

"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 percent 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 percent gain for the Vanguard FTSE Emerging Markets ETF and the 1.6 percent 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 percent year to date, while the iShares MSCI India ETF is up 31 percent year to date, and the PowerShares India ETF is up 29 percent.

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 U.S. dollar has pressured global currencies this year, the Indian rupee is relatively unchanged against the U.S. dollar since January and so far has not significantly affected U.S.-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.

(Reporting by Ashley Lau in New York; Editing by Linda Stern and Steve Orlofsky)
 

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