India ETFs Will React To Election

May 01, 2019 How do you see India’s markets reacting in the short term to Modi winning or losing?

Sinha: I put a 70% probability on Modi winning. Depending on how clean a majority he gets, markets would rally a lot. Even if Modi and the BJP [Bharatiya Janata Party] fail to get a clean mandate, markets could still stay positive.

On the other hand, if they don't form a government—which I see as a smaller 30% chance—there’ll be a sell-off in the short term.

But even if there’s a sell-off, it creates good entry points for people who are in the market for the medium term. Unless you’re timing markets, I’d recommend investors dollar-cost into Indian equities because we don't know which way the elections will go and what will happen. Most India ETFs are up over the last five years, underperforming U.S. equity ETFs but outperforming broader emerging market ETFs. Is that performance surprising to you?

Sinha: Emerging markets as an asset class has lagged U.S. equities; for that matter, everything has lagged U.S. equities. The U.S. has been the economic engine of the world since after the financial crisis.

But that doesn't mean that will be the case forever. In fact, there's always a mean reversion.

We are bullish on emerging markets as an asset class, but there are select sectors within EM which are more attractive than others. I’m bullish on consumer sectors and information technology, rather than traditional defensive sectors like energy and banks, which are heavily owned by governments across EM.

If you really want to benefit from emerging markets, don’t be a tourist. The allocation can go bad. You have to base yourself in emerging markets for the medium term, and that's when you realize the upside potential these markets can have. How do valuations for India’s equities look right now compared to history?

Sinha: Relative to its own history, it's definitely a bit cheaper—especially mid and small cap equities, because that portion of market has been hammered more than the large-cap equities.

If Modi stays in power—and there is a high likelihood he will—medium and small cap equities will skyrocket. Those companies are more tied to the local economy, and they don’t export much. For investors who are willing to take a little more risk, that’s a good area to focus on.

Email Sumit Roy at [email protected] or follow him on Twitter sumitroy2

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