Finding ETF Opportunities In India

Amay Hattangadi of Morgan Stanley Investment Management points out the bright spots in the emerging market’s uneven recovery.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy
[This article originally appeared in our June issue of ETF Report.]
India is a clear emerging market favorite these days, showing economic growth promise at a time when many economies around the world are struggling to expand. But the ongoing recovery isn’t reaching every pocket of the economy evenly, according to Amay Hattangadi, executive director of the Emerging Markets Equities team for Morgan Stanley Investment Management.
Hattangadi, who is based in Mumbai, offers here his boots-on-the-ground perspective on what India’s growth trajectory looks like, and what opportunities lie ahead for discerning investors. 
India’s stock market has been one of the best-performing emerging markets in the past year. Just about every macroeconomist out there has a favorable view on India these days. Is the hype warranted?
It’s not uncommon for markets to undershoot or overshoot. In the current situation, my view is that some sectors in the markets are probably running ahead of the economy. While economic growth, as measured by the revised GDP numbers, looks decent, the fact is that corporate earnings, as well as anecdotal evidence on the ground, suggest that the economy is going to take longer to turn around than what was initially anticipated. 
The almost-consensus view at around the same time last year was that the economy was in the process of bottoming out and we were going to see signs of a turnaround by October/November 2014, coinciding with the festival season in India. But that date has come and gone. What we’ve seen is that while some indicators are picking up, there are many segments of the economy that clearly seem to be taking longer to turn around. 
If you ask me at this point in time, I’m not saying the recovery is not happening—the recovery is happening—but it’s uneven. There are pockets where it’s happening better, and there are large segments where it’s just taking longer to pick up. Because of that, there is increasing worry that the stock markets are running ahead of themselves. The recent market correction on the back of weaker-than-expected quarterly earnings reported for many companies has to some extent set expectations to more realistic levels.
Are structural reforms not equally reaching all of the economic sectors?
Most reforms are still in the pipeline, so it’s too early to guess how these will impact the economy. Recent data seem to confirm the fact that rural growth is slowing. 
The other aspect is, when it comes to the revival of investment in the economy, clearly it appears that the private sector is not going to embark on capital spending in any large way at this point, and it is the government that will have to do the heavy lifting. This was evident in the recent budget that was announced in February, in which the government is targeting a pretty significant pickup in capital spending of the magnitude of at least 25%. 


What are the biggest challenges India’s Prime Minister Narendra Modi faces today?
The usual challenges of a large economy. Trying to engineer a turnaround for a large economy is going to take time. And remember, as a backdrop, we have pretty slow growth across the world, which makes a turnaround even harder. We have to recognize that it’s not possible to accelerate in isolation when the rest of the world is having muted growth. However, we do think some of the measures that the government is planning will help in laying the foundation for a stronger economy.
How much of India’s equity market momentum has been fueled by all monetary policy around the world? 
If you look at the equity market inflows last year, it wasn’t much better than in 2013. We’ve been seeing foreign inflows in the range of $15 billion annualized in the equity markets, which is within a normal range. The bigger delta in terms of foreign flows last year was in the fixed-income market. 
For a U.S. investor, where is the biggest opportunity in India today? 
The equity market affords great opportunities. India is unique because it’s a very diversified market, compared to most other emerging markets, where one or two sectors may dominate the broad index. The diversity of the market allows you to rotate stocks and sectors depending on what themes are playing out well. 
In the second half of 2013, when India was in the midst of a crisis and the currency was falling off sharply, it was possible for an equity investor to position a portfolio that was outward-looking, i.e., focused on exports, whether in the health care or in the IT services sectors. In 2014, you could maneuver the portfolio towards more domestic stories in the consumer staples and discretionary space. 
In the end, investors should keep in mind that investing in India should be more broad-based. It should be long term. The track record shows that India has consistently outperformed other emerging markets. 
Should we expect to see the Indian stock market take a little bit of a breather here after running up so much? 
The market action of the last few weeks does suggest that markets have been taking a breather. It’s difficult to time markets. Also, we think average country P/E multiples are misleading.
Are you saying growth potential justifies valuation? 
The average price/earnings multiple for India will always look higher than some other emerging markets. It should be about 16 or 17. But it’s a growth economy with huge potential, so valuations cannot be looked at in a vacuum. Moreover, as I said earlier, the sector weightings also drive the average P/E multiple. Indian markets have a relatively higher weight in health care and consumer-related sectors, where the P/E multiple is higher than materials and energy. 


Regarding fixed income, Moody’s recently changed India’s sovereign rating to positive from stable. What does that mean for U.S. investors?
The broad view is that inflation is coming off. And as inflation comes off, we will see further easing in the monetary policy. We’ve had two rate cuts of 25 basis points each. 
There’s certainly room for more rate cuts in the next six to 12 months. The fact that the interest rate trajectory is downward, inflation expectations are trending lower—these are all positive factors for foreign investors in the debt market. But let’s remember there are caps for investing in the government securities market and corporate debt in India. Unless the rules are changed, there’s limited headroom available for investment in these markets.  
What’s the most important thing U.S. investors should keep in mind about India?
I’d summarize it this way: The economy appears to be taking longer to recover than initially anticipated. The recovery is not going to be even across sectors. Lower commodity prices are great news for India—we’re already seeing the benefits of lower prices in operating margins for several companies.
The government is doing the right things. It’s laying the groundwork. The trajectory of interest rates is down, and we’re going to see further monetary easing in the quarters to come. That’s all positive.
And on the equity market, it’s a very well-diversified market, which is what makes the investment case for India so compelling.
Most of all, I’d say we would never recommend people try to time the market. Go with a broad-based approach, and stick with long term. Moreover, the Indian market offers huge opportunities to invest beyond the frontline index stocks.  


Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.