Christian Magoon: India ETF investors experienced a chaotic first six months of 2012. This India ETF recap video highlights the challenges the market has and is facing. It also points out some of the India ETF products that have produced positive results for investors. View the video and check out the article below.
Main Challenges Facing India ETF Investors
Possible S&P Downgrade – Credit ratings agency S&P downgraded its outlook for India in early 2012. It went from stable to negative due to political paralysis, a rising fiscal and current account deficit and the slowing of the economy. In early June S&P made a statement that a downgrade of India’s credit rating from investment grade to junk status could be imminent. This move would increase headwinds for the Indian economy to reverse its GDP slowdown and hurt India ETF investors.
Rising Inflation – Inflation has been a problem for India because of its rapid growth over the years. Year over year the headline inflation number most recently was just over 7%. This number has been on the rise the last few months and the Prime Minister of India has stated it is way to high. Inflation acts as another tax on Indian citizens and businesses. While the 7% inflation number is still well below recent double digit highs, it remains a concern to investors.
High Interest Rates – India’s interest rate is at 8%, a huge difference from the developed world or even fellow BRIC member China. As GDP has been slowing businesses have been clamoring for a cut in interest rates to make new purchases and investments more affordable. In addition Indian consumers also suffer as big ticket items like appliances and cars become less attractive. The challenge for the Reserve Bank of India (RBI) is to balance the risks of inflation with the risks of a GDP stall. Thus far the RBI has decided to give preference to inflation and has kept rates at elevated levels.
Weak Rupee – The Indian rupee has suffered mightily this year due to U.S. Dollar strength brought on by the EU debt crisis and poor financial conditions inside India. As the value of the rupee declines, India loses purchasing power. This is especially the case in the energy arena as India imports around 85% of it oil. Forgetting oil price spikes, the devaluation of the rupee has acted like a tax on oil imports. This should be a long term concern for India ETF investors.
Slowing GDP – After reading all the India ETF concerns above, it is no wonder that India’s GDP is slowing down. Traditionally India has been the receiver of investor assets due to its long track record of above average growth. While even a slowed down India today still produces impressive growth, this is a trend that needs to be reversed.
Despite all these concerns, a handful of India ETF products have actually gained this year. Here’s the performance chart from IndiaETFs.com.
Tickers Listed: EG Shares India Small Cap ETF (NYSEARCA:SCIN), EG Shares India Consumer ETF (NYSEARCA:INCO), EG Shares India Infrastructure ETF (NYSEARCA:INXX), WisdomTree India Earnings ETF (NYSEARCA:EPI), Market Vectors India Small Cap ETF (NYSEARCA:SCIF), iPath MSCI India Index ETN (NYSEARCA:INP), iShares S&P India Nifty 50 Index (NYSEARCA:INDY), PowerShares India (NYSEARCA:PIN).
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. Follow him on Twitter @ChristianMagoon. 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.”