Obama and Modi’s Alliance and Other Key Catalysts Boosting India ETFs

The WisdomTree India Earnings Fund (NYSE:EPI) spiked 9% year to date (through Jan. 31) vs. 2% for iShares MSCI Eafe Index Fund (ARCA:EFA), a benchmark for foreign-developed markets and 1% for iShares MSCI Emerging Markets. iShares MSCI India (NYSE:INDA) jumped 9% also year to date.

Capital inflows amounted to $1.2 billion year-to-date as the Sensex reaches new records. Among eight Asian markets tracked by Bloomberg, it’s received the second highest rate of inflows after Taiwan. India’s stock market is changing hands at a premium of 13% over global markets even after last year’s outsized returns. The current premium is much smaller than the 80% premium in 2007 and 40% premium from 2010, according to Credit Suisse.

As Barron’s reported, Morgan Stanley in late January upgraded its rating on India to overweight. India’s return on equity has jumped from multi-year lows to 16.3%, which is 38% more than the average ROE for emerging markets. The higher the ROE, the better for investors as ROE measures a profitability given the amount of money shareholders have invested.

President Barack Obama and India’s Prime Minister Narendra Modi’s alliance has unified the world’s two largest democracies. The two have even created a Modi-Obama hotline -- an unprecedented means of communications between the two countries and intend to visit each other more. A stronger India-U.S. partnership will lift trade between the two countries, benefitting both foreign investors and India’s people. Against the backdrop are free falling oil prices, which is saving the government billions in subsidies.

During Obama’s late three-day visit in late January, he and Modi agreed to cooperate in developing jet engine technology, aircraft carriers and small-scale surveillance drones. The two also plan to unite in manufacturing equipment for Lockheed Martin Corp’s C-130 transport plane. About 75% of India's imported arms were Russian over the past five years. U.S. only provided 7% of India's arms imports over the last five years as India’s second-largest arms provider. India wants to look to its new friend for arms and reduce its dependence on Russia.

India’s aspires to sooner than later become a global military superpower. According to the Stockholm International Peace Institute, India took credit for 14% of the world's arms imports as of March 2014. India boosted the maximum foreign-ownership level in military and defense companies to 49% from a former limit of 26% last year to in an effort to attract more industry expertise and foreign direct investments. Investors can expect more money to be poured into India’s military complex as the U.S.-India defense coalition is very young.

In an environment of oil trading at less than $65 a barrel, India is saving $45 billion annually. according to Credit Suisse. The government can funnel the savings to capital expenditures that are currently at multi-decade lows. It’s likely to build highways, railways, defense projects, renewable energy, housing and rural roads. The government could increase capex to 1.2% of the country’s GDP in fiscal year 2016, wrote Credit Suisse in an investment strategy report issued Jan. 27.

“With the government clearing regulatory roadblocks and also issuing EPC (engineering, procurement and construction) contracts, not only does construction activity pick up, balance sheets of contractors are likely to improve as well,” Credit Suisse wrote. “Construction share of GDP is at decade lows as impaired balance sheets and regulatory issues have slowed private sector capex.”

India’s goal is to produce 63,000 megawatts of nuclear power -- up 14 times from current levels -- by 2032. The U.S. is ready to assist, Obama declared, with India’s goal of boosting solar energy installations five times by 2022. The plan is projected to cost $160 billion.

No official trade deals were signed between the U.S. and India during Obama’s visit. However, the U.S. aims to reach $500 billion in trade with India. According to PricewaterhouseCoopers, India tops the chart (along with Saudi Arabia) of countries were TV sales are projected to increase the fastest from 2013-2018, with a 16% compound annual growth rate. About 50% of India’s 250 million households subscribe to pay TV. That’s expected to blast off as the middle-class swells.

India is going head to head with China to win contracts to build infrastructure in surrounding countries. It’s doing whatever it can to free up funds to build infrastructure. Food Minister Shanta Kumar has proposed decreasing the percentage of the country’s population that receives rice and wheat subsidies from 67% to 40% to save the country $6.5 billion a year.