India ETFs Could Rebound After August Volatility

Indian equity exchange traded funds (ETFs) suffered record outflows in August compared to other asset classes but industry experts suggest the country could rebound.

Data from Lyxor revealed that Indian ETFs saw outflows of around €200 million last month from Europe-listed funds, following positive flows of €250 million and €35 million in June and July respectively.  The db X-trackers MSCI India TRN Index UCITS ETF (XCX5) is down 6.4 percent year to date in Sterling terms.

Lyxor noted that “country ETFs such as Indian, South Korean and Russian ETFs were among the most affected by investor fears of a riskier environment” despite general ETF inflows in August reaching a record of €9.7 billion from European investors.

India Still Has Potential

Irene Bauer, chief investment officer of Twenty20 Investments, suggested that investors have been de-risking and have been disappointed by the number and impact of recent reforms since Narendra Modi came to power. However, she pointed out that India is not as reliant on China compared to some Asian countries and should benefit from lower commodity prices.

“India is not such a basket case. It could rebound as it’s now undervalued. But I’ve been saying that for a while now,” she said.

Long term hurdles remain for India. Research from the World Bank published yesterday lamented South Asian countries have struggled to make the most of urbanisation to “join the ranks of richer nations”. Annette Dixon, vice president for the South Asia region of the World Bank, said policymakers in the region face a choice: to continue with the same policies or undertake reforms to tap into the unrealized potential of South Asia's cities.

However, there is still a healthy number of global assets - $2.2 billion – invested in ETFs that track CNX indexes, the main indexes of Indian equities from the National Stock Exchange of India. (The NSE announced yesterday it will rebrand its indexes to “Nifty” e.g. the Nifty 50 instead of the CNX 50, from 9 November.)

Potential 24.4 Percent Returns This Year

In emerging markets overall, it has not been all gloom and doom for investors, despite the iShares MSCI Emerging Markets UCITS ETF (IEEM) down 15.7 percent year to date in Sterling terms and over $1 trillion ETF outflows over the past 13 months. Research released earlier in September from asset manager SCM Direct found that the average total return obtained by investing in emerging markets for 12 months – at times of volatility similar or greater than today – was 24.4 percent, based on equity returns and volatility in this region from March 2000 to 15 September. This indicates emerging market ETF investors could receive 24.4 percent returns over the next 12 months too.

Alan Miller, chief investment officer at SCM Direct said: “In fact in the vast majority of instances – 93 percent, when volatility was as high as it is today, investors would have received a 10 percent or more return over the next 12 months and in no 12 month period was a negative return recorded.”