India ETFs: Warning Signs In GDP Report?

by on August 31, 2010 | ETFs Mentioned:

If investors weren’t already aware of the tremendous “growth gap” between the developed and emerging markets of the world, a report Tuesday out of New Delhi served as a nice reminder. India’s gross domestic product grew by 8.8% in the quarter ended June 30, roughly in line with analyst estimates for expansion in the world’s largest democracy. That marks the fastest GDP growth in more than two years, outpacing the 8.6% clip from India’s fiscal first quarter ended in March. Coming just days after the U.S. revised its GDP growth estimate for the same period downward to 1.6%, India’s pace of expansion is truly remarkable.

Reaction to the latest GDP figures was primarily positive. “The data underscore the strong recovery in India’s economy, Asia’s third-largest and among the earliest to emerge from the global economic crisis,” writes Anant Vijay Kala. The impressive figures figure to give Indian policymakers enhanced flexibility in their efforts to combat inflation, which has recently shown signs of accelerating.

Cause For Concern?

Investors were encouraged by bullish statements from Finance Minister Pranab Mukherjee, who indicated that growth could exceed government projections of 8.5% to 8.75% for the fiscal year as a whole. And while it’s difficult to find negatives in a report showing 8.8% GDP expansion, some analysts digging deeper into the latest round of statistics uncovered a few potential causes for concern [also see the Next Frontier Of ETF Investing: Long/Short Trades].

Industrial output in June rose about 7% from a year earlier, the slowest growth in more than a year and the first time that measure of expansion came in at less than 10% in nine months. The domestic demand picture is also a bit troubling. “Private consumption slumped to 0.3% y-o-y in Q2 from 2.6% in Q1, fixed investment has dropped to 3.7% from 17.7%, government consumption growth was negative and both export and import growth contracted,” wrote Nomura in reaction to the news. “The demand side, therefore, paints a completely different and a much weaker picture than the robust outlook presented by the supply side.”

The biggest threat to India’s continued expansion, however, centers around monetary policy decisions to be made in coming months. With inflation bordering on double-digit territory, the Reserve Bank of India has already raised the repurchase rate by 100 basis points so far this year and the reverse repurchase rate by 125 bps. Expectations are now for the RBI to increase both rates by 50 to 75 basis points by the end of the current fiscal year (March 2011). While clearly necessary to prevent inflation from spiraling out of control, some economists worry that the tightening campaign will weigh on local demand, a major driver of manufacturing activity [see India ETFs: Five Ways To Play].

India ETF Options

For investors looking to establish exposure to India, there is no shortage of options in the ETF space [use the Country Lookup Tool to find all equity ETFs with exposure to India]:

  • Large Cap Equities: The most popular India ETFs generally focus on large cap equities. The largest and most heavily traded is the WisdomTree India Earnings Fund (EPI), a fund that tracks a fundamentally weighted index comprised of profitable Indian equities. Other large cap-heavy India ETFs include the PowerShares India Portfolio (PIN) and iShares S&P India Nifty 50 Index Fund (INDY). iPath also offers an exchange-traded note covering this asset class, the iPath MSCI India Index ETN (INP).
  • Small Cap Equities: A relatively new development in the ETF space is the introduction of products focusing on small cap Indian equities. Because small caps are less likely to include mega cap energy firms and multi-national companies, some investors view them as better “pure plays” on the local Indian economy than their large cap counterparts. Options here include the EGShares India Small Cap ETF (SCIN) as well as a similar fund from Van Eck (SCIF).
  • Currency ETFs: Tuesday’s impressive GDP report seemingly paves the way for India’s central bank to continue hiking key interest rates, making the Indian rupee an intriguing investment option. If rates continue climbing higher, the currency is likely to appreciate as yield-hungry investors race in. The best bet to play this trend is the WisdomTree Dreyfus Indian Rupee Fund (ICN), with the Market Vectors Indian Rupee/U.S. Dollar ETN (INR) as a nice alternative as well.

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Disclosure: Long SCIN.