Waiting On The Rupee To Help India ETFs

Emerging markets currencies and equities are struggling once again this year, but the WisdomTree Indian Rupee Strategy Fund ICN continues to be relatively sturdy compared to broader baskets of developing world currencies.

ICN “seeks to achieve total returns reflective of both money market rates in India available to foreign investors and changes in value of the Indian Rupee relative to the U.S. dollar,” according to WisdomTree.

However, investors are still waiting for the rupee's less bad status to trickle down to equities in Asia's third-largest economy. The WisdomTree India Earnings Fund (ETF) EPI is struggling this year, although it was one of the better-performing options among single-country ETFs following BRIC equities the past two years.

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Indian Stocks

Slack performances by Indian stocks are viewed as disappointing because, as a net importer of oil, India's economy was expected to benefit from lower crude prices. However, the rupee's relative sturdiness could prove alluring for investors as 2016 moves forward.

“Relative performance for currencies is often measured via the carry trade (i.e., selling a currency that yields a lower interest rate and using the proceeds to purchase a higher-yielding currency),” said WisdomTree in a recent note.

“In 2015, the INR and its associated interest rates outperformed all EM currencies from a risk-adjusted basis when compared against the U.S. dollar. Someone who invested in Indian rupees via forward contracts and collected the interest rates would have earned positive returns in an otherwise very challenging landscape.”

Broader Global Market Concerns

The slowing Chinese economy and expectations that the Federal Reserve will proceed with more rate hikes this year are among the issues hampering Indian equities and the rupee this year. Additionally, Indian stocks are pricey compared to the MSCI Emerging Markets Index, but EPI helps ameliorate that problem by allocating more than half its weight to the quartile of Indian stocks with the lowest valuations.

The ETF's underlying index holds the most profitable Indian companies that are accessible to foreign investors. Profitability is the key there at a time when emerging markets earnings growth is, at best, anemic.

“We expect the rupee to be fairly stable over the course of the next year. A 2 percent to 3 percent further depreciation could not be ruled out; however, in an otherwise challenging landscape this would be a good performance. Furthermore, any depreciation should not offset interest income available, as has been discussed above,” said WisdomTree. “It is also important to keep in mind that any relative strength in the rupee could be very supportive of the performance of Indian equities in the emerging market universe.”