Christian Magoon: Whether an owner of the largest India ETF (NYSEARCA:EPI), or the largest India ETN (NYSEARCA:INP), all India investors need to brush up on their knowledge about monsoons as Indian markets are beginning to feel the weight of a poor start to the monsoon season. Monsoons are massive sea breezes that are seasonal in nature that bring much needed water to many parts of the globe. The Indian summer monsoon season lasts from April to October and affects all of India. Here’s a great educational graphic on monsoons from North Carolina State University.
India ETF investors should monitor India’s current monsoon season due to a rain shortfall. The season is about one third done but is behind the average rainfall total by about 20%. Should this shortfall continue or get worse it could impact inflation, domestic GDP and cause a material drain on the Indian government.
Inflation, especially food inflation, has been a problem in India over the last few years. Although recently more subdued, food inflation spiked as high as 25% year over year last Fall on particular food items like vegetables. A drought in India would obviously push food prices upward levying a heavier burden on all consumers.Food inflation could have a domino affect on GDP growth in India. India’s GDP has already been contracting and a food inflation problem can only hurt its efforts to recover as consumption could lessen and economic resources like labor and equipment are deployed to solve this issue.
Finally, the Indian government is already in crisis mode as it tries to dig itself out of the economic mess it has slid into. Policy paralysis in the government has caused growing fiscal and current account deficits. This has placed India at the edge of a potential sovereign debt downgrade to junk bond status by credit ratings agencies. While the government may not be able to reform quickly enough to stop a downgrade, it certainly can’t afford to deal with a major drought simultaneously. The financial and time burden to deal with a crisis like this would materially impact forward progress for India and consequently its equity markets.
India ETF investors have already seen a variety of risk and reward in 2012 yet India ETF products have managed to produce solid gains as evidenced by the chart below from IndiaETFs.com
India ETF investors should continue to monitor the status of the monsoon season in India. A growing shortfall in rain could actually be a sign of a large economic storm brewing that seems wise to avoid.
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.”