India (INR) : A trend line to be monitored

The ETF INR (Lyxor UCITS), created in 10/2006, listed in Euro on Euronext, tracks the MSCI Net Emerging Market India Index and represents 85% of India's total market capitalization.

Although the index is replicated in USD, it is composed of 77 Indian stocks, which therefore involves exposure to the local currency, the Indian rupee.

The ETF's expenses are in the upper part of our library and amount to 0.85% while the AUM reached  1326M €. The replication method is indirect (via a swap) and dividends are capitalized.

Alternative ETFs: INDA ( iShares, in USD), CI2 ( Amundi, in Euro)

 

Index & components

 

The interest of the INR tracker is twofold : firstly, it bets on the most dynamic and promising emerging economy in the world, while the large sectoral diversification ensures a very satisfactory coverage of the Indian economy with a high proportion of growth firms.

The significant share of the technology sector (14%) including Infosys, in the index, seems to us an asset with regard to the quality of the IT / Software sector in India with leading players. The index also appears to be well balanced in terms of sectors, with 24% for Financials, 7% for Health Care, 12% for Consumer Discretionary, 12% for Energy, the share of Industrials tends to increase with 10% for Materials and 9% for Consumer Staples.

India, whose GDP is expected to reach $ 2600 billion in 2017 (reaching or even surpassing France in the fifth place in the world), showed better resistance than other emerging countries to the slowdown in world growth in 2015, compared with Brazil or Russia, to the extent that it benefited from the decline in oil prices and is not impacted by the fall in raw materials. Growth was strengthened in 2016, reaching 7.6%, making the Indian economy the most dynamic in the world.

Mr Modi is slowly progressing in his reform objectives, failing a majority in parliament, but is experiencing successes in particular on labor flexibility in certain regions and in terms of private investment, in addition an impressive program of dematerialisation / demonetization has had a negative impact at the end of 2016 and early 2017 but is expected to be positive in the medium term by reducing the underground economy.

The Government's program aims to develop the national industry, which is still too narrowly diversified and mainly focused on the textile and chemical sectors; the industrial sector employs 20% of the population and contributes less than 1/3 of the GDP. The services sector is the most dynamic part of the Indian economy and contributes to 52% of GDP by employing about 25% of the working population. The software sector is rapidly growing and boosting service exports and modernizing the Indian economy.

India is heavily dependent on its imports in particular on energy and benefits from relatively low oil prices. India has begun to catch up on China, with the advantage of being the largest democracy in the world (1.5md of inhabitants) with a positioning on the high-tech sectors. The rise of infrastructure and foreign investment should contribute to the industrial take-off of the country as well as the ambitious tax reforms underway: "the single VAT", which entered into force on July 1, and aims to harmonize the taxation of a country where, so far, all 29 states have their own regimes, should have a positive impact in the long term.

 

Latest developments

INR's performance has been positive since the beginning of the year (+ 13.5%, following a stagnation in 2016 due to the demonetization reforms). The growth of India has slowed down for some time, following the reform on the "unique VAT" and the Modi government is very criticized. He chose to make some welcome adjustments to his reform: Finance Minister Arun Jaitley decided to lower the GST rate on 27 products in order to boost household consumption and also decreed that small businesses would now make their VAT returns every quarter, instead of every month, which had become a real headache. Far from being completed, the reforms are going in the right direction, even though they have, for the time being, put a brake on growth, which should not exceed 7% this year, while consumption, which accounts for more than 60% of GDP, is now the country's only growth driver. Engaged in "Make in India" to respond to a desire to reindustrialize the country, the Modi government has also simplified the most common administrative formalities and opened up most of its sectors to foreign investors. But the chronic weakness of infrastructures, the ever-thorny land tenure and endemic corruption are still obstacles. India needs to develop its exports and more foreign investment.