Eric Dutram: As developed markets continue to struggle, many investors have shifted their focus to emerging nations. Undoubtedly, three of the most popular destinations have been in the BRIC bloc, specifically in the case of Brazil, India, and China.
In terms of investment in these three emerging giants, some of the biggest gains could be had in both the consumer and infrastructure sectors. That is because these segments are often considered to be ‘low hanging fruit’ and are usually some of the first ones that newly industrialized economies see big gains in as they make the transition to upper-middle income nations.
This is usually the result of more middle class consumers demanding not only higher quality staple products, but more choices in terms of discretionary goods as well, at least on the consumer side. Beyond this, transportation and general infrastructure systems like power grids and water treatment also must be upgraded in order to support growing populations that are demanding more and higher quality services, just like their developed market peers.
While investors have seen a bump in the road in terms of consumer spending growth in these markets thanks to rising inflation and a general market slowdown, infrastructure spending is continuing to roar ahead both as a necessary expenditure to keep growth elevated and as a stimulus stopgap (read Five Emerging Market Infrastructure ETFs for the Coming Boom).
The trend is already in full swing in both China and Brazil as both of these nations have either recently undergone, or are in the process of, spending more on various transportation and general infrastructure systems. Both of the countries have been heavily focused on transportation initiatives in this regard, as well as spending due to high profile events like the Olympics (2016 in Rio), or the World’s Expo in Shanghai in 2010.
Meanwhile, India has been left in the dust, as the country has been shut out of a number of high profile international events while the few that the nation has had, like the 2010 Commonwealth Games, have turned out disastrously for the world’s most populous democracy. If anything, events have been getting worse in the country as close to 40% of the nation doesn’t have electricity while close to 340 million people—basically the U.S. and Canada—recently suffered through a massive power outage across much of the Northern part of the country.
If that wasn’t enough, the incredible 340 million person power outage was recently outdone by an even more massive loss of power just a few hours later. In this failure, close to 600 million people, more than the entire population of North America and half of India’s population, suffered through another crippling outage.
Clearly, if India wants to remain relevant in an era of superpower emerging markets, it will have to vastly increase its spending on infrastructure in order to keep up. The country currently ranks in the bottom third for overall quality of infrastructure including the bottom 20% in terms of electricity supply and telephone lines, underscoring just how desperate the situation has become in India (see Three Emerging Market ETFs to Limit BRIC Exposure).
In fact, some in the sector believe that India will have to raise infrastructure spending to 10% of GDP by 2017 in order to keep hitting lofty growth targets. At current GDP levels, this translates into spending of about $185 billion per year, representing a huge windfall for companies that are focused in on the space.
For investors who believe that this will be a key growth market in the country for the foreseeable future, a closer look at a quality option in the ETF space from Emerging Global Shares, the INDXX India Infrastructure Index Fund (NYSEARCA:INXX), could be an interesting pick. Below, we highlight some of the key points regarding this targeted fund which could be a great way to benefit from more Indian infrastructure spending in the near future.
The fund holds roughly 30 securities in its basket and tracks the INDXX India Infrastructure Index which is a benchmark of firms in various infrastructure industries including metal miners, energy producers, transportation, and utility companies. The product charges investors 85 basis points a year in fees and trades on modest volume of roughly 14,000 shares a day, suggesting modest bid ask spreads (see more in the Zacks ETF Center).
From an industry perspective, construction materials take the top spot at 16%, and are closely trailed by electric utilities (15%), and mobile telecom services with a double digit weighting as well. Interestingly, these are all some of the sectors that are the worst-rated in the Indian economy, suggesting that they could be among the biggest beneficiaries from a spending boom.
In terms of individual firms in the product, Tata Motors takes the top spot, followed by Power Grid Corp of India and then Ultratech Cement, which combined, represent 19% of the total assets in the fund. Investors should also note that value stocks account for roughly 60% of the total, while large caps make up over 80% of the fund from a cap perspective (read Does Your Portfolio Need An India ETF?).
Unfortunately, the fund has been a laggard in terms of 52 week performance, losing 30.6% in the time period and lagging the main ETFs tracking the India market by several hundred basis points over the past year. However, the trend has seemingly reversed in recent months as INXX is now among the best performing large-cap focused India products, adding 8.6% in YTD terms.
This surge in performance, which has beaten out PIN, INP, and EPI in the time frame, could suggest that fortunes are finally beginning to turn around for the India infrastructure sector and that it could be an interesting time to buy near the bottom for the beaten down fund (read India ETFs Behind The Crash).
While INXX will certainly see some significant volatility, both the fund’s momentum and the broad spending trends in the space seem to be favoring the bulls in the space, implying that it could be an interesting time to go long in this EGShares ETF for those who are looking for more assets in the emerging market space that can play on some of the sector’s most important trends.
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