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Why You Should Invest In India ETFs Now

After rough trading so far this year, the Indian market is now showing rays of hope for investors. Worries over monsoon deficiency, the key cause of last year’s upheaval is unlikely to bother this year. Added to this, better-than-expected fiscal fourth-quarter earnings set the stage for India investing on fire lately (read: Fragile Five ETFs Not At All Fragile This Year? ). La Nina: Better Monsoon Expected This Year Last year, lower rains weighed on the all-important agricultural sector. But, the president of the Confederation of Indian Industry (CII) recently forecast India GDP growth of 8% for fiscal 2016-17 driven by the usual monsoon. The agency now expects the agricultural sector to expand at the rate of 6% this year. “That adds about 0.5-1% to GDP,” as per CII president. Even Deutsche Bank is supportive of this fact. India is going to face a La Nina event this year, which is the positive phase of the El Niño Southern Oscillation and results in cooler than average sea surface temperatures in the central and eastern tropical Pacific Ocean. It is often seen as the opposite of El Nino (read: 5 ETF Losers of 2015 Hoping for a Rebound in 2016 ). As per the research house , the Indian agricultural sector exhibits a solid correlation with La Nina with average annual rains being higher than the long-term average. The bank noted that agri GDP in La Nina years expanded at an average 7.8% year over year versus an average 2.3% jump seen in years without La Nina. Not only the agricultural sector, Deutsche Bank indicated that GDP, private consumption and investments growth average 8.9%, 7.4%, 10.4% respectively in La Nina years against average growth of 5.8%, 5.2%, 7.2% respectively in years with no La Nina. Earnings Recovery on the Horizon? Nearly 76 BSE 500 companies that came up with earnings releases recently give cues of an earnings recovery. As much as 64.5% of them beat consensus estimates for net profit while 63.2% surpassed the top line. Higher government spending and a rebound in commodity prices have boosted companies’ earnings, per analysts. Though it is too early to take a call over the whole Indian earnings, as of now the trend is positive. Monetary Policy Easing The Reserve Bank of India ( RBI ) lowered its key rate by 25 basis points (bps) to 6.50% on April 5, 2016, to bolster business in the economy. This was the first cut in 2016 followed by four rate cuts in 2015. The rate is now the lowest in over five years. Investors who put more emphasis on slowing GDP data for the U.S. economy for the October-December quarter (7.3% followed by 7.7% growth rate in the prior quarter), will now find some reason to invest in Asia’s third-largest economy. IMF Moderately Bullish The International Monetary Fund, which reduced global growth forecasts recently, maintained the same for India for this year at 7.5% . Steady private consumption is the reason for the organization’s optimism though softer exports and listless credit growth are deterrents to the economy. All these make the case for India investing stronger. While all India ETFs should stand to gain, below we highlight a few ETFs that have chances of outperforming ahead. i Shares S&P India Nifty Fifty Index ETF (NASDAQ: INDY ) The fund looks to track the performance of the top 50 companies by market capitalization in the Indian market. Banks is the top sector in the fund with about 23.2%. The fund has a Zacks Rank #2 (Buy). EGShares India Infrastructure ETF (NYSEARCA: INXX ) Infrastructure stocks and the ETF should also get a boost from monetary easing. As this sector is debt-heavy in nature, a decline in interest rates will favor it. The fund has a Zacks Rank #2. WisdomTree India Earnings ETF (NYSEARCA: EPI ) The fund looks to follow the investment results of profitable companies in the Indian equity market. The fund has a Zacks Rank #2. EGShares India Consumer ETF (NYSEARCA: INCO ) As per the India Brand Equity Foundation , revenues of the consumer durables sector are expected to touch US$12.5 billion in fiscal 2016, up from US$ 9.7 billion in fiscal 2015. Since private consumption is pivotal in India, a look at this consumer ETF is warranted. The fund has a Zacks ETF Rank #3 (Hold). Link to the original post on Zacks.com

Popularity And Price Increase For ‘Low Vol’ Funds

“Low volatility” funds have surged in popularity recently as investors have poured nearly $10 billion into them so far in 2016, which has significantly increased their price. At the end of 2015, one such “low vol” fund (i.e., specializing in stocks that fluctuate less than the broader market) had a P/E ratio just above the market as a whole. By the end of April 2016, it was “nearly 10% more expensive than the market average,” reports a recent Wall Street Journal blog piece. Nardin Baker of Guggenheim Partners Asset Management, who has written on and managed such funds for decades, says that low volatility stocks have outperformed the market by an average of about 1 percentage point annual with roughly 30% less risk. Dan Draper, who manages a low volatility fund for Invesco Powershares, says that investors pay less in bull markets for stocks that don’t make big moves, which made them cheap. “But can unpopular investments continue outperforming after they become popular?” the article asks. Andrew Ang of BlackRock says that potential overvaluation is “a valid concern” and “excessive crowding of any strategy should send up a red flag of warning,” but that these stocks are not currently “at extreme values by any standard.” Although Baker says “anybody who’s in low vol right now, they’re not going to be hurt,”but Dave Nadig of FactSet says that “if everybody’s chasing the same stocks, eventually they will no longer be cheap and returns will regress to the mean.” Ang says investors should not “go into low vol to outperform the market,” but “to reduce your risk.”

Real Risk Taking Will Not Return Until The Fed Flip-Flops

In a strong bull market, higher volatility stocks tend to outperform lower volatility stocks. The PowerShares S&P 500 High Beta (NYSEARCA: SPHB ):iShares USA Minimum Volatility (NYSEARCA: USMV ) price ratio demonstrates how the bull market in equities has been giving way since the highs in the Dow and the S&P 500 one year ago (May 2015). Similarly, in a strong bull market, growth-oriented assets tend to outperform value-oriented holdings. Instead, the iShares Core Growth (NYSEARCA: IUSG ):Vanguard Value (NYSEARCA: VTV ) price ratio illustrates a shift in preference from higher-flying growth securities to “safer” value stocks. The hallmark of bullishness, indiscriminate risk taking, is no longer present in equities. It has been steadily eroding in bonds as well. Take a look at the SPDR High Yield Bond (NYSEARCA: JNK ):iShares 7-10 Year Treasury (NYSEARCA: IEF ) price ratio. The remarkable rally off of the February lows offered some “hopium” that the worst is over for junk debt. On the other hand, the long-term trend toward pursuing safety in treasuries as well as the likelihood of “sell in May” defensive posturing does not favor yield seeking speculation going forward. Perhaps risk taking will return in a meaningful manner soon. I doubt it. Valuation extremes would need to become valuation bargains or, at the very least, the Federal Reserve would need to expand its balance sheet (QE/QE-like activity) yet again. Low borrowing rates alone cannot do the trick when corporate earnings (EBITDA) are deteriorating, revenue is softening and the year-over-year percentage growth of net debt is exploding. Consider the following chart from the Financial Times. Non-financial corporations found themselves leveraged to the hilt in 2000 and again in 2007. Bear market retreats of 50%-plus in stocks occurred shortly thereafter. Why should investors believe that this time is different? The corporate debt balloon is going to be a problem even if central banks perpetually support asset prices through direct purchases and/or rate manipulating schemes. Ten years ago, companies carried $4.6 trillion in outstanding debt. Today? We’re looking at $8.2 trillion. The annualized growth rate of that debt far exceeds the growth rate of profitability or sales. Worse yet, HALF of the $8.2 trillion in corporate bonds is set to mature over the next five years. The implication? Any recession in the next five years will see the vast majority of corporations issuing new debt in an environment where their coupons will be at higher yields and their total total debts will be more difficult to service. Think the resilient U.S. consumer can magically make the problem go away? Fat chance. Since 2001, consumers have only maintained respective living standards by borrowing more in credit to make up for the shortfall in disposable personal income. Take a good hard look at the chart below and ask yourself, “Can this possibly end well? How long can households spend more than they take home before the caca hits the fan once again?” Click to enlarge Can catastrophe be averted? Anything’s possible. Heck, the U.S could experience a remarkable renaissance of high paying careers. It is more probable, unfortunately, that the working-aged population will grow at a faster clip than jobs themselves. There have been 14 million new jobs created (mostly low-paying) since the end of the Great Recession, yet 17 million people entered the labor force in the same period. Not enough jobs. Not enough high-paying employment. And too much household borrowing to make up the difference. Click to enlarge If corporations are getting closer to retrenchment — voluntary or involuntary deleveraging — there will be less money spent on stock buybacks . That would be a problem for the stock market. If households are getting closer to retrenchment — voluntary or involuntary deleveraging — the reduction in consumption would be problematic for equities as well. Brick-and-mortar retailer woe may largely be attributable to online retailer cheer, though some of the troubles are related to consumer spending. Bottom line? Riskier assets are unlikely to gain significant ground in the near-term. An investor would be wise to maintain a defensive posture until valuations improve dramatically or the Federal Reserve flip-flops, ultimately announcing plans to expand its balance sheet once more. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.