Indian stocks and the related ETFs cooled off in September and into October after Prime Minister Narendra Modi’s National Democratic Alliance (NDA) didn’t have the expected electoral success. This sparked a sell-off in previously hot Indian equities.
While political risk must always be assessed, India is one of the most politically stable developing economies. Global investors remain fond of Modi’s pro-market policies. Over the past week, the WisdomTree India Earnings Fund (EPI ) – one of the oldest and largest funds in the India ETF category – traded higher following some encouraging political headlines out of India.
India’s form of democracy is different than that of the U.S. The election years of their states are not the same across the board, however, there is even-numbered year uniformity. In good news for EPI and Indian risk assets, the NDA made gains in recent state elections. This allays concerns that Indian voters may be moving away from that party.
Indian Election Results Could Stoke EPI Rally
In what could be a catalyst for Indian stocks, in the months ahead, Modi’s NDA outperformed expectations in the recent state elections.
“NDA has kept a strong momentum in state elections, helping it retain two key states, Haryana and Maharashtra. This has instilled confidence in the market, and also helped strengthen NDA’s majority in the Upper House of parliament, the Rajya Sabha, making it easier to pass bills,” according to WisdomTree research.
Those are encouraging headlines, but some market participants remain concerned about valuations on Indian equities. Indeed, stocks there are among the priciest in any of the world’s large economies – developed or emerging.
Fortunately, EPI is constructed in such a way that it steers investors toward profitable companies and away from those that are richly valued. That methodology hasn’t been a drag on performance. Over the past three years, the WisdomTree ETF beat the MSCI India Index by a margin of 1,660 basis points. That implies the ETF could be exactly what investors are looking for. It supplies India market participation without the excessive multiples.
“(EPI) navigates this trait by taking a valuation-conscious approach, only selecting profitable companies in the index and weighting them by their earnings instead of market capitalization. This approach allows the overall expensiveness of the portfolio to come down considerably relative to market capitalization-weighted alternatives,” added WisdomTree.
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