Under the investor-friendly, pro-growth leadership of Prime Minister Narendra Modi and Reserve Bank of India (RBI) Governor Raghuram Rajan, the Indian economy is projected to be the fastest-growing large economy in the world this year. India is the “bright spot” in the slowing global economy according to Christine Lagarde, IMF managing director. Economic growth looks likely to come in at 7.3% in 2015 and at a similar rate next year.
Nevertheless, the RBI is not satisfied with the latest performance data. Economic activity indicators turned lower in August and September, following stronger performance at the beginning of the third quarter. There is continued weakness in rural demand and in private investment. The falling global oil price has helped check inflation and has permitted the government to cut fuel subsidies, but has hurt exports of which petroleum products account for 13%. The RBI cut its key interest rate, its repo rate, by 50 basis points to 6.75% on September 29, the fourth reduction this year. RBI governor Rajan stated at the time that, “In India, a tentative economic recovery is underway but is still far from robust.”
The strong reform orientation of the government, coupled with credible monetary policy, certainly has contributed to the economy’s recovery to date and is grounds for optimism about the future. Yet significant obstacles remain. Needed reforms in antiquated land-acquisition laws stalled in parliament this summer, as did a proposed value-added goods and services tax. Deficiencies in India’s infrastructure remain a major impediment to increased investment. A further problem is the volume of bad loans in the banking sector and the state banks’ need for additional capital. The situation probably will not improve until there is significant privatization in this sector. Prime Minister Modi’s ability to press forward with reforms will depend on his ability to sustain the political momentum needed for reform, despite the setbacks in parliament last summer.
India’s equity market, while joining in the widespread emerging market retreat at midyear, has outperformed the broader emerging market so far this year. Whereas the iShares MSCI Emerging Markets ETF (N:EEM) is down 7.12% year-to-date October 15, the iShares MSCI India ETF (N:INDA) is down only 1.99%. These are US dollar returns and India’s performance relative to the performance of other emerging markets has been helped by the greater resilience of India’s currency versus the US dollar.
At Cumberland Advisors, India is the only emerging market currently in our International and Global portfolios. We are using the WisdomTree India Earnings Fund ETF (N:EPI), which tracks the WisdomTree India Earnings Index. It has broad exposure covering some 300 securities from the large-, mid-, and small-cap segments. The index does not follow a market-capitalization weighting methodology; instead, company weights in the index are based on profits companies generate. The earnings focus gives this ETF a valuation bias. This bias may account for the recent strong relative performance of EPI since the third quarter market correction. Over the past month EPI gained 4.98% compared with the 3.40% advance of the market –capitalization based INDA. Furthermore, EPI has the largest daily volume of the India ETFs.
Bill Witherell, Chief Global Economist.