India’s Virtuous Cycle With A Catalyst

August 24, 2015

The Influence Of China

On its own, the reform cycle is positive for Indian stocks. However, China’s recent decision to depreciate the yuan has made India’s situation look relatively more attractive and lowered expectations for future inflation in India.

India is a major importer of energy, and oil prices have fallen in response to lower expectations for Chinese growth. Inflation has also declined, coming in at 3.78 percent in July, down from 5.40 percent in June and below expectations of 4.46 percent.

China’s slowing economy also creates space for India’s growth to rise in importance. In the previous decade, China’s growth rate outpaced India’s. With China’s decline and India’s improvement, it is likely India’s growth will pass China’s either in 2015 or 2016 (using China’s inflated official numbers).

The decline in inflation makes it a possibility that the Reserve Bank of India will cut rates in the future, further supporting growth.

The virtue of a strong economy makes up India’s trailing P/E ratio of 20x, which is considerably greater than the average emerging market trading at 14x earnings. Historically, India has traded at this premium. Based on higher expected earnings growth, this premium is justified.

Portfolio Application

Emerging markets have been a challenging part of the portfolio to hold in recent years. Concentrating the portfolio in Asia, away from commodity producers, has helped performance.

With China’s economy slowing further, commodity importers are likely to outperform. Within that group, countries that trade a lot with China—like Taiwan and Korea—are more likely to feel the effects. India is much less reliant on China, and its demographics are attractive.

Tilting your emerging market allocation to India has the potential to benefit your portfolio.

At the time of writing, CLS Investments held a position in INDA. CLS Investments is an Omaha, Nebraska-based third-party investment manager and ETF strategist. CLS began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds, with more than $2 billion invested. Contact CLS’ Chief Investment Strategist Scott Kubie at 402-896-7406 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.

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