India’s economy took a pounding from the Covid-19 pandemic. But could the impact of vaccines—combined with the country’s underlying drivers of growth—boost Indian-focused exchange-traded funds in 2021?
India has been hard hit by the pandemic, with more than 10 million cases. Its economy suffered in 2020; in a January 2021 note, IHS Markit estimated that gross domestic product in the fiscal year 2020-21, which ends March 31, would contract by 8.9% compared with the previous year.
However, there could be positive signs for the future. The firm notes a rebound in economic activity since September, and expects GDP growth to bounce back by 8.9% in the 2021-22 fiscal year. Meanwhile, on Feb. 1 the government announced increased spending on infrastructure in its budget, which analysts believe could also support growth.
India’s recovery rally was led by high-quality, large-cap companies, particularly those in technology, energy and health care, says Rene Reyna, head thematic and special product strategist at Invesco ETFs & Indexed Strategies. The firm operates
ETF (PIN), a $107.2 million fund that had returns of 18.5% in 2020 and is down about 2% so far this year, through Jan. 29. Mr. Reyna says India’s large information-technology sector was a particular driver of the rebound, “benefiting from aggressive work-from-home efforts.”
A sustained revival will largely depend on a successful vaccine rollout, the chances of which are helped by India’s huge vaccine-manufacturing capacity. The government’s goal is to vaccinate 300 million people—out of a total population of 1.3 billion—by the middle of the year.
‘‘A successful vaccine rollout may bolster business and consumer sentiment, which should be positive for Indian equities,” says Mr. Reyna.
The largest India-focused fund by assets is the $4.8 billion
ETF (INDA), which is down a little more than 2% year-to-date after a return of 14.83% in 2020.
Jeff Spiegel,
U.S. head of iShares megatrend and international ETFs, points to underlying trends that could support Indian companies in the coming years: favorable demographics, with large numbers of people escaping poverty and building wealth annually; political stability; and a diversified economy that has relatively low correlation with the S&P 500 and stocks in other emerging countries, providing an opportunity for diversification.
Jeremy Schwartz,
global head of research at WisdomTree, highlights interest-rate cuts in 2020 by the Reserve Bank of India; the rate at which the bank now lends to other banks stands at 4%. While the bank chose to keep rates unchanged in December, citing inflation concerns, this is still “a very different sort of interest-rate environment” for the economy, one that should be supportive of broader economic growth, says Mr. Schwartz.
WisdomTree India Earnings Fund
(EPI), a $723 million ETF, is down almost 2% in 2021 so far, having seen returns of 18.56% in 2020.
ETF (INDF), launched in October, targets the country’s financial sector; the $3 million fund is down a little more than 3% year to date.
Amit Anand,
co-founder of INDF operator NextFins, expects India’s financial sector—and the economy more widely—to benefit from the government’s Covid stimulus later this year. India’s support was less focused than efforts, say, in the U.S. on direct-to-consumer stimulus like unemployment benefits, “and a lot more structural in nature.” The government guaranteed bank loans to distressed sectors, for instance, and created tax incentives for manufacturing capital investment.
Dave Nadig,
chief investment officer and director of research at ETF Trends, says options are limited for investors interested in India; there are just 12 funds focused on India, “unlike China, for example, where we have dozens of niche plays.” However, he adds, India is a fairly investor-friendly emerging market, so for investors who want to focus on India itself, as opposed to making it part of a broad emerging-markets play, “it’s reasonable to think about individual ETFs.”
Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.
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