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The Bright Future Of The Indian Consumer

After Narendra Modi’s political party won the general election in May 2014, the Indian economy set off in a new, promising direction. Favorable demographics and foreign direct investments will be the long-term tailwinds. Tumbling inflation makes consumers more confident in spending. It is estimated that by 2030, India is likely to surpass the USA and China and become the world’s largest consumer market. Economists and investors have turned optimistic about the prospects of the Indian economy since Narendra Modi’s political party won one of the largest elections in the country’s history last May. Before Modi became a Prime Minister, he led one of the fastest growing states in the country, so many people believe his government will be able to push through the most critical reforms to liberalize local industries and revive economic growth. According to the International Monetary Fund, the reform plan of the new Prime Minister is promising, although the key is going to be implementation . In its latest World Economic Outlook, the IMF forecasts that India will grow at 6.3% this year and 6.5% in 2016, when it is likely to overtake China. In contrast to the accelerating Indian economy, the Chinese economy is still projected to struggle with its decelerating growth rate. In 2015, China’s growth rate is expected to slow to 6.8%, while a year ago it reached 7.4%. One should not forget that India is the second most populous country in the world, with over 1.27 billion people (17.5% of the world’s population), and is projected to be the world’s most populous country by 2025. What is more interesting is that more than 50% of the Indian population is below the age of 25, and it is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan. This population composition together with Modi’s ambitious ‘ Make in India ‘ program to attract foreign direct investments will undoubtedly support the ongoing rapid expansion of India’s middle class consumer market. A very good piece of news for the Indian economy is that the great fall in global crude oil prices, 60% in the last six months, has helped to finally tame the long-standing high inflation rate. In particular, the rising prices of food have slowed, which frees up more disposable income for India’s middle classes to spend on other goods and services. The improving optimism of Indian consumers can be evidenced by the following graph showing the recent progress of consumer confidence. (click to enlarge) According to Rachna Nath, head of retail and consumer at PwC India, consumers are still hesitant about making big luxury purchases despite the record values of the index. Consumers are positively bullish because of what the new government is doing right now, but all of them will say that we also need to see it translate on the ground. However, Indians do seem prepared to splash out on some premium fast-moving consumer goods, like foodstuffs, for example. Just a few years ago the Indian market was dominated by basic glucose biscuits. Today, higher-end varieties have grown popular. On the back of better incomes, the overall FMCG market is anticipated to expand at a CAGR of 14.7% to 110.4 billion dollars during 2012 and 2020. By that year, some reports even predict that India will become the world’s third largest middle class consumer market just behind China and the US, which it will likely surpass by the end of the next decade. Probably the best suited ETF for the trends highlighted above is the EGShares India Consumer ETF (NYSEARCA: INCO ), which is designed to track the Indxx India Consumer Index measuring the market performance of 30 Indian consumer sector companies. Since Narendra Modi assumed the office of Prime Minister in late May, the fund has added more than 34%, while two major Indian equity benchmarks, the CNX Nifty and the S&P BSE SENSEX, have gained 20 and 19% respectively. Since the beginning of this year, the fund has yet outperformed both indices by more than 6%. Moreover, most of the time, shares of the fund trade at a modest discount to NAV. Last year, there were 211 out of 252 trading days when the fund’s market price was below the reported net asset value, and this year, there have already been so far 26 such days. Presumably, the most significant INCO’s drawback lies in it’s liquidity as the fund was launched relatively recently and has a little over 52 million dollars assets under management. The picture below displays key statistics of INCO’s portfolio as of 12/31/2014. Source: EGShares India Consumer ETF’s factsheet Over the long-term, the highly inclusive sector of automobiles & parts in INCO should not only benefit from rapidly growing car and two-wheeler manufacturing industry , but also from the intended investments into infrastructure, which can be directly grasped through another ETF – the EGShares India Infrastructure ETF (NYSEARCA: INXX ). Nevertheless, one should be aware that many investors currently perceive these infrastructure projects to have unfavorable risk-reward relationships . On the other hand, it wouldn’t be a mistake to purchase the WisdomTree India Earnings ETF (NYSEARCA: EPI ), iShares MSCI India ETF (BATS: INDA ), iShares S&P India Nifty 50 Index ETF (NASDAQ: INDY ), PowerShares India Portfolio ETF (NYSEARCA: PIN ), or any other ETF, which provides exposure to the broader Indian equity market, as Modi’s reforms concern the economy as a whole. Disclosure: The author is long INCO. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Why Lower Inflation In India Is A Good Sign For International Investors

With lower inflation in India than previous years, HSBC forecasts the Indian rupee will remain highly stable this year, reducing exchange rate risk for investors. The Sensex stock market index has vastly outperformed that of Brazil, China and Russia – India’s stock market offers very attractive growth prospects. As an English-speaking country and a centre of technology worldwide, I believe India is at a distinct competitive advantage relative to its peers. Of all the four BRIC economies, I believe that India in particular has the potential to become the most powerful emerging market in the world by 2040. The country has never been over-reliant on manufacturing to sustain economic growth – India’s English speaking workforce along with the country’s status as a major technology give its economy a distinct advantage compared to that of Brazil, China and Russia. In particular, with India now set to meet inflation targets, this could mean very good news for international investors looking to get in on the India growth story. In comparing inflation rates across the BRIC economies, we can see that China has the lowest inflation rate currently at 1.50%, with Russia having the highest inflation rate at 11.40%. India’s inflation rate stands at 5.00%. Inflation is clearly an important consideration for international investors. As an American investor (or a European one, in my case), inflation has a direct impact on exchange rates – higher inflation typically results in a lower exchange rate as consumers stop spending due to higher prices. If this is the case, then a weakening Rupee means that our investment is worth less in dollars or euros. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Sources: Trading Economics In terms of inflation rates, India has been successful in bringing inflation down from a previous rate of 8% in 2012. All else being equal, China would appear to look more favorable as a lower rate of inflation would not have as great an impact on investment value. However, deflation is currently more of a concern in China and this could also lead to exchange rate risks for international investors. Moreover, we can see that of the four emerging stock market indexes, the Indian Sensex Index has vastly outperformed those of China, Brazil and Russia: (click to enlarge) Source: Yahoo Finance Additionally, HSBC projects that the Indian rupee will continue to maintain strength, as lower oil prices will continue to lead to improvements in current account and inflation targets. HSBC reports that the rupee is expected to oscillate between 62.5 and 63 to the dollar this year, which should lead to a high degree of exchange rate stability for international investors. I expect that the long-term outlook for India’s stock market will remain positive due to effective management of inflation and strong fundamentals – stable exchange rates and inflation management means that the Sensex is likely to experience less volatility than that of other emerging markets. In conclusion, India’s use of effective monetary policy in reducing inflation to sustainable levels is clearly working. This is especially significant to international investors who are looking for stable returns yet vibrant growth. Additionally, given that the Sensex has vastly outperformed the stock indexes of the other BRIC economies, I am highly optimistic on India’s growth story going forward. Now that you’ve read this, are you Bullish or Bearish on ? Bullish Bearish Sentiment on ( ) Thanks for sharing your thoughts. Why are you ? Submit & View Results Skip to results » Share this article with a colleague

Best ETF Strategies For 2015

Stocks are on their way to close this year on a strong note–with the S&P 500 index up 15% year to date-the third consecutive year of double-digit growth for the index. With the economy growing at the fastest clip in more than a decade, stocks are expected to continue their upward move, as companies will be able to boost their profits. Plunging energy prices and low interest rates will further benefit stocks. At the same time, after a bull run of almost six years, stocks are not cheap. And with the Fed expected to start raising rates sometime next year, many wonder how long the stock market party can go on. As we head into 2015, it may be a good time to look at the investment landscape and reposition your investment portfolio for the new year. Can the Bull Run Continue in 2015? U.S. stocks are still more attractive compared to most other asset classes and investors should continue to favor them in coming months as well. The Fed has gone out of its way in assuring investors that it will be “patient” in raising rates. Some may argue that rising rates will kill the stock market rally, but history tells us that the initial phase of rate increase is almost always accompanied by higher stock prices. And the reasons are clear-the increase in rates reflects an improving economy and lower risk of deflation-which are positive for stocks. Thus, stocks are the place to be in next year. Top Sectors for 2015 My favorite sectors for 2015 are Technology, Retail and Financial. Many U.S. corporates have accumulated huge piles of cash on their balance sheets and as the economy gathers steam, they should be more inclined to increase spending on R&D and Capex, benefiting tech firms. Low oil prices and slowly rising wages are good for U.S. consumers. Strong holiday sales suggest that consumer spending will grow as plunging oil prices increase disposable incomes. Financials have come a long way since the great recession with much healthier balance sheets and improved risk management systems in place. With improving economy, the sector has been able to grow earnings and increase dividend payouts. The Vanguard Technology ETF (NYSEARCA: VGT ), SPDR Retail ETF (NYSEARCA: XRT ) and SPDR Financials ETF (NYSEARCA: XLF ) are worth considering. Many energy stocks and ETFs look enticingly cheap now but I think it would be better to wait till we see some signs of oil prices bottoming out, unless you can stomach high volatility in anticipation of gains over much longer period. What to Expect from the Bond Market? Robust economic growth in the U.S. in the face of soft economic conditions in many other parts of the world, coupled with accommodative monetary policy worked great for bonds. In fact, the unexpected rally in the Treasury bond market this year surprised most. Treasury bonds-in particular longer term– may continue to benefit from heavy buying by foreign investors, as long as interest rates remain ultra-low in Europe and Japan, the U.S. dollar continues to strengthen and long term inflation expectations remain benign. Shorter term yields however may rise in anticipation of fed funds rate hike and thus the trend of yield curve flattening may continue next year. Municipal bonds were also big winners this year as investors poured $23.9 billion into municipal debt funds due to their tax benefits and relatively “safe” status. With flat supply expected in 2015 , municipal bonds may continue to outperform. Emerging Markets-Winners and Losers? With the plunge in oil prices, emerging markets landscape has undergone a significant change. Countries like China and India are among the biggest beneficiaries of cheap oil. China is the second largest importer of oil in the world and each $1 decline in oil price saves the country $2.1 billion annually. India relies on imports for 75% of its energy needs and oil accounts for about a third of its imports. Further, the government spends a lot on fuel subsidies. Declining oil prices will not only help the country narrow down its trade and budget deficit but also bring down inflation. With easing inflation, the central bank will be able to lower interest rates, boosting economic growth. Take a look at WisdomTree India Earnings ETF (NYSEARCA: EPI ). Indonesia and Thailand are also set to gain from the precipitous decline in oil prices. On the other hand, Russia and Venezuela in particular are likely to experience further pain next year. Prepare for Higher Volatility Markets saw some bouts of high volatility this year but in general the indexes maintained their positive momentum. Investors should however prepare themselves for more twists and turns in 2015 as the Fed moves closer to normalization of monetary policy. Geopolitical risks may further add to the uncertainty. Consider adding some low volatility ETFs-like SPDR S&P Low Volatility ETF (NYSEARCA: SPLV ) and iShares MSCI Minimum Volatility ETF (NYSEARCA: USMV ) to the portfolio. These not only shine during highly volatile market environments but also deliver superior risk adjusted returns over longer term.