India ETF Report: An Interest Rate Cut, But Wall Of Worry Mounts (INDY, PIN, SCIF, EPI, SCIN)
Christian Magoon: India ETF products had a positive week as the Reserve Bank of India (RBI) announced a 50bps cut to India interest rates. The size of the cut was a pleasant surprise to investors and showed an aggressive posture from the RBI. Indian interest rates had not been cut for three years as inflation concerns forced the RBI to raise rates before a plateau in later 2011. Here’s a recent look back at Indian interest rates, including Tuesday’s cut.
Indian markets and India ETFs rallied off Tuesday’s rate cut. Then the markets began to digest the RBI’s comments. The RBI believes further rate cuts are going to be difficult to come by as inflation and the Indian government’s fiscal deficit are of significant concern. This disappointed markets and pushed the most popular and best performing India ETFs down from their rate cut fueled rally. Here’s a chart of the three largest India ETFs, the WisdomTree India ETF (NYSEARCA:EPI), the PowerShares India ETF (NYSEARCA:PIN) and the iShares India ETF (NYSEARCA:INDY) as well as the best performing India ETF year to date the Market Vectors India Small Cap ETF (NYSEARCA:SCIF).
Year to date, all non leveraged India ETFs are well into positive territory despite a slowdown over the last two months. The leading India ETF products in 2012 have been the small cap ETFs, SCIF and (NYSEARCA:SCIN). This past week however saw both ETFs under perform most India ETFs, possibly indicating in a market rotation to the more stable larger cap India ETFs. Here’s the performance grid snapshot organized by one week performance from IndiaETFs.com. This grid shows all India ETF and ETN products available to U.S. investors.
Going forward it appears that Indian markets face a wall of worry. Often bull markets are said to climb walls of worry but the walls India faces are significant. They include an increase in tension with China after an Indian test fire of a nuclear capable missile that has the range to hit Chinese cities, internal inflation concerns, a flare up in the EU debt crisis, new government taxes on short term Foreign Institutional Investor gains, a current account and fiscal deficit for the Indian government, a lower likelihood of further interest cuts by the RBI in the short term, a falling rupee and concerns about oil prices. Each one of these issues are fairly formidable individually and their combination is causing a massive wall of worry to develop.
This past week investment firm UBS cut their outlook on Indian markets from overweight to neutral based off some of the concerns mentioned above. Given these issues, a neutral to underweight position in India appears prudent until many of these situations become more clear.
Christian Magoon is Publisher of GoldETFs.biz and IndiaETFs.com. He is also CEO of Magoon Capital, a strategic consultant firm to asset managers. Christian Magoon is an ETF insider, having launched over 40 ETFs in the United States to date. A widely recognized thought leader on finance and market issues, Christian regularly contributes to many financial media outlets. Prior to forming Magoon Capital in 2010, Christian was President of Claymore Securities (now Guggenheim Investments), where he built one of the fastest growing and most innovative ETF businesses in the country, gathering more than $3 billion in AUM in three years. He launched more than 40 ETFs, introducing many “firsts” to the U.S. market, including the first Frontier Markets, Sector Rotation, Solar Energy, Timber, BRIC and suite of China focused ETFs. Christian consistently provides his industry insights and knowledge as a commentator in the U.S. media speaking publicly on macro investment issues and ETF related topics. In 2008, he was named by Institutional Investor News as one of the five people to watch in the U.S. ETF marketplace. In 2011, Financial Planning magazine dubbed Christian an “ETF Pioneer.”