India ETFs Are Hot, But May Be Overbought

September 18, 2014

India may well take investors to the promised land, but getting there won’t always be a smooth ride.

Investing in India has been quite rewarding to investors in the past year and is likely to remain that way as the country’s relatively new political and economic leaders continue to inspire high hopes that growth in the world’s biggest democracy will be robust for years to come.

The election of Prime Minister Narendra Modi early this year and the naming a year ago of Raghuram Rajan as the Reserve Bank of India’s new governor together amounted to a one-two punch that has helped stabilize India’s rupee currency and breathe serious life into India’s stock market following a sharp sell-off in 2013.

That sell-off was unleashed by former Federal Reserve Chairman Ben Bernanke’s “tapering” comments about the end of quantitative easing. With the Fed just about finished with tapering that QE, and turning its attention at this week’s policy meeting to framing when it might begin to actually increase short-term interest rates, one wonders if the rally in Indian equities might be about to hit a wall.

But for now, Indian equities—as measured by the iShares MSIC India ETF (INDA | C-92)—are up almost 25 this year, compared with less than 6.5 percent for the broadly focused iShares MSCI Emerging Markets ETF (EEM | B-100). INDA has assets of $1.47 billion, or almost twice what it had only four months ago.

Double-Edged Sword

INDA’s asset increase is a combination of the rise in INDA’s price and powerful inflows—$766 million so far this year, according to ETF.com’s Flows Tool. Those variables speak, on the one hand, to the growing popularity of India-focused strategies. But those flows and price appreciation are also indications that perhaps investors ought to be worried that Indian equities may be overbought.

“Over the medium term, we continue to believe that in India there are very good opportunities for earnings growth, and valuations are not extremely expensive,” said Darshan Bhatt, co-chief investment officer at Glovista Investments, an ETF-only advisory firm based in Jersey City, N.J. “It’s a country within emerging markets that we believe is positioned well for the next 10 to 15 years.

“But in the immediate term, the markets have run up extremely high. There are high expectations for the new government, and you have to give them some time to deliver some reform measures,” he added.

Bhatt is hardly alone in his cautionary approach. Brendan Fitzsimmons, head strategist at Medley Global Advisors, a New York-based global macro research and advisory firm, shared the same view in a recent interview with ETF.com’s “Alpha Think Tank.” He argued that India has a promising longer-term story, but near-term perils are likely, if not inevitable.

India_ETFs_Vs_EEM_YTD

Chart courtesy of StockCharts.com

 

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