Thanks to increased risk appetites over the last few days, some investors have begun to once again pile into emerging market focused ETFs. Yet, the specter of inflation has kept others at bay from many emerging nations as the rate of price increases in certain industrializing economies could bring down growth rates and lead to widespread unrest. No where is this more true than in the nation of India, one of the world’s most important, and largest, emerging markets. While the nation doesn’t offer any updates on inflation in the near term, the country does look to release its GDP growth rate for the most recent quarter, helping investors to ascertain how the economy is holding up in the high inflation environment and what the outlook is for the rest of the year in this South Asian economy.
GDP growth in India has been well above the world average for quite some time; before the May release, growth was above 8% (yoy) in the previous four quarters. Yet, the most recent quarter represented a shift to the sub-eight percent mark, as the Indian economy grew just 7.8% (yoy) in the most recent quarter. This was below expectations and marked the second time in a row that the nation failed to match the consensus when it came to growth. Now, investors are looking for Indian GDP growth to decline even further, falling to a 7.6% increase in year-over-year terms. If this growth rate is realized, it will represent the slowest increase in six quarters and could suggest that the potent combination of rate hikes, economic slowdowns and price increases are finally taking their toll on the Indian economy [also see India ETFs: Warning Signs In GDP Report].
Thanks to this data release, investors should look for the PowerShares India Portfolio (PIN) to remain in focus throughout today’s trading session. The fund tracks the Indus India Index which is designed to replicate the Indian equity markets as a whole, through a group of 52 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other. Currently, the fund is titled towards energy and tech companies, although firms in the basic materials and financial services sectors also make up at least 10% of the fund’s assets as well [see Can India ETFs Beat Inflation Epidemic?].
PIN has, like most emerging market funds, been beaten down severely over the past few months as the product has lost more than 15% in the previous four weeks and more than 24% in the year-to-date period. A solid GDP report could help to change this but one that is too high could push the RBI to hike rates yet again, possibly leading to a sell-off. Thanks to this, investors will likely be hoping for a modest beat on the GDP front but nothing that gets the reserve bank involved. So if GDP comes in above 7.6% or at least above last quarter’s 7.8% reading, look for PIN to rise modestly on the day. If, however, GDP falls below this 7.6% level, many investors will likely take it to mean that India is approaching a slowdown and we could see Indian ETFs continue their recent spat of weakness well into September [see more charts of PIN here].
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Disclosure: No positions at time of writing.