Just when you think India is due for a market correction, the dynamic duo of prime minister Narendra Modi and central banker Raghuram Rajan prove you wrong.
A surprising rate cut this week helped lift the Wisdom Tree India (EPI) exchange traded fund by 0.6% over the last five days, beating out the MSCI Emerging Markets and S&P 500 indices.
“Reformers will be the performers,” says Gaurav Mallik, managing director of emerging markets for State Street Global Advisors, a $2.4 trillion wealth management firm in Boston. “This is why all eyes are on India right now. Today, value in emerging markets is locked up in resources, energy and materials. But the only way to unlock that value is you need to reform the business. India is doing that,” he says.
Emerging Global Advisors, a New York-based ETF company, agrees. They touted reforms as the No. 1 for buying Indian equities. In this case, reforms means tax changes and rules changes that allow for greater absorption of foreign money into Indian companies.
On balance, Saturday’s 2015-16 fiscal budget pleased investors despite a marginal sell-off of 0.5% in the stock market. Indian equities are not overbought yet. The relative strength indicator is still in the 50s. An RSI of 70 is a sell signal for technical traders.
Not overbought yet. The Wisdom Tree India ETF is trading above its moving averages but volume remains low. The Relative Strength Index, a measure of whether or not a security is overbought or oversold, indicates the Wisdom Tree India fund is safe from technical sell-offs for now.
Why Buy India Now?
Emerging Global Advisors lays it out this way in a recent presentation to clients.
1. Reforms Matter.
In India, these include foreign direct investment, the Land Acquisition Bill, the coal and power sector, direct transfer subsidies, streamlined tax regimes. The Bombay Stock Exchange’s Sensex index is up 19.15% in rupees since Modi took over in May. It rose 8.9% in all of 2013.
2. China-style GDP Growth.
India is expected to have the fastest GDP growth rate in emerging markets and will beat China by 2016 if it grows over 7.5% next year. The government is counting on 8%.
“You have to be in India,” says Peter Kohli, CEO of DMS Funds, an emerging markets specialty firm in Leesport, Pa. “It’s a bull market for the next five years,” he told me over a sushi lunch at Koi in New York recently.
3. Raghuram Rajan.
Investors like the monetary policy discipline of Rajan. India is focused on managing inflation, which helps the central bank to lower interest rates as it did recently. A stable and strengthening rupee also reduces forex risk for U.S. investors. The lower price of oil and better fiscal management, including cutting government subsidies, will help reduce twin fiscal deficits.
4. Corporate Earnings.
India Inc’s corporate earnings growth rate is expected to average 7% this year, which is better than the average earnings growth rate in the MSCI All Country World Index. Next year is even better once corporate taxes get cut, and the federal goods and services tax replaces state taxes for companies shipping goods across boundaries. Bloomberg data estimates average corporate earnings for the MSCI India Index to be over 16%.
5. Early Innings.
It’s not too late to buy India. Fund managers like Kohli recommend buying on pull-backs in the market. Current forward valuation levels point to sustainable growth at a reasonable price over the long term, Emerging Global says.
“Modi knows where and how he wants to get from point A to point B and he’ll do it,” says Vladimir Signorelli, president of boutique research investment firm Bretton Woods Research in Long Valley, NJ. BWR released their monthly index rankings for 46 countries. India ranked at No. 10. It is second only to China as a top two emerging markets for investors for the month ahead. China was ranked No. 7. E.U. countries, the U.S. and Japan all finished out the top 10.
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