An Almost Rally For India ETFs

Friday's glum performances aside, major India ETFs have experienced something of a stealth rally over the past month. That rally, or dead cat bounce as doubters may be apt to call it, comes after ETFs tracking the "I" in the BRIC acronym spent the bulk of the first quarter as emerging markets laggards.

That is saying something because many ETFs offering exposure to the largest emerging markets have been duds in 2013. At the country-specific level, all four of the major BRIC ETFs, including the WisdomTree India Earnings ETF EPI, are lower year-to-date. EPI was off four percent at the start of trading today, but at least that is far better than what investors have been treated to with the comparable China and Russia ETFs.

Heading into Friday, EPI had gained 4.7 percent in the past month while the rival PowerShares India Portfolio PIN was up nearly three percent. The iShares S&P India Nifty 50 Index Fund INDY surged 5.3 percent. All three are lower by at least 1.5 percent Friday, but money has been flowing into Indian equities.

Foreigners bought $292.1 million more of Indian stocks than they sold last week, the highest level since mid-March, Bloomberg reported earlier this week. Year-to-date, Indian stocks have the second-best inflows at $10.6 billion among 10 major Asian markets behind Japan, according to Bloomberg.

Inflows to Indian equities have come amid headlines that have undoubtedly been more negative than positive. For example, even with an obviously tenuous grasp on an investment-grade credit rating, in late February India unveiled fiscal 2013-14 budget of $309 billion, a 16 percent jump from the prior fiscal year.

Additionally, Finance Minister P. Chidambaram, who is widely believed to be a candidate for prime minister, is looking to impose new taxes on large companies to boost revenue rather than reduce spending. Failure to reduce spending, as some countries in the West have learned the hard way, usually draws the ire of credit ratings agencies.

So just days after the budget was proposed, Fitch Ratings said it it would likely downgrade India to junk territory. At BBB-, India already has the lowest credit rating of the four BRIC nations.

Interestingly, and perhaps not surprisingly, the Indian government believes the country is worthy of a credit upgrade. That may be behind the declines in India ETFs today because on Thursday, Indian officials met with Standard & Poor's in an effort to land that upgrade.

Indian officials argued the outlook should be changed, and the country deserved an upgrade for actions taken by Prime Minister Manmohan Singh's government to put finances in order and bolster investor confidence, Reuters reported. Officials made a similar pitch to Fitch earlier this month.

Traders and investors in the likes of EPI, PIN and Indy will want to circle May 31 on their calendars. That is when India is scheduled to deliver deficit data for 2012/13. A number of around, or better yet below, five percent of GDP could spark India ETFs higher.

On an entirely unrelated note, there is something else to consider with India ETFs, at least EPI and INDY, which have $1.04 billion and $459.3 million in assets under management, respectively. That being seasonality.

Specifically, this pair of ETFs is often quite dreadful in the second quarter. INDY debuted in November 2009, so prior to this year, there are three second quarters worth of data. The ETF traded lower in all three. EPI debuted in February 2008. Even when being nice and excluding the savage repudiation of emerging markets seen throughout that year, the only second quarter of the past four that saw EPI perform to the upside was 2009.

Those bullish on India should hope 2013 brings a repeat of 2012 when EPI and rival India ETFs offered gains of roughly 10 percent in the third quarter. Just be sure to watch the ratings agencies.

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