India (INR) : Momentum is fading

The INR ETF (Lyxor UCITS), created in 10/2006 and quoted in Euro on Euronext replicates the MSCI Net Emerging Market India index and represents 85% of the total market capitalization of India. Although the index that is replicated is listed in USD, it is composed of 79 Indian values, which implies an exposure to the local currency, the Indian rupee.

The ETF costs are in the upper part of our sample and stand at 0.85% while AUM amount to € 1246m. The replication method is indirect (via a swap) and there is a dividend capitalization policy.

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

 

Latest developments

The performance of INR since the beginning of the year is -5.3% after a + 20.8% increase in 2017 which corresponded to the rebound of the index after the shock related to the demonetization reforms in 2016.

The Indian economy is largely dependent on global growth and in particular on foreign capital which enables it to ensure its industrial development. The rise in the USD and long US rates are therefore problematic and a trade war could have significant effects, especially in case of pronounced Chinese slowdown. The other danger is the rise in oil prices, which have returned to their two-year highs following the new Iranian oil embargo, which may weigh on Indian consumption, while the country imports 50% of its gas and 80% of its oil, making its public finances very dependent on fluctuations in oil prices.

In the absence of any additional shock, the Indian economy should rise to the 5th place worldwide (ahead of France and England) by 2018 and ahead of China in terms of GDP growth (around 7% expected) with growth consumption as main driver, which represents 60% of GDP formation.

 

Index & components

The interest of the INR tracker is twofold, it allows in the first place to bet on the most dynamic and promising emerging economy of the world while the important sectorial diversification ensures a very satisfactory coverage of the Indian economy with a high proportion of 'growth companies.

The significant share of the technology sector (15.9%) - which includes notably Infosys - in the index, seems to us an asset with regard to the quality of the IT / Software sector in India including leading players. The index also seems to be well balanced in terms of sectors, with 24% for financials, 13.4% for energy, 10.5% for consumer discretionary, industry's share trend to increase with 8.6% for materials and 10.8% for durable goods.

India, whose GDP reached $ 2458 billion in 2017 (the seventh place just behind France) has shown better resistance than other emerging countries to the slowdown in global growth in 2015, compared to China, the Brazil or Russia, insofar as it benefited from the decline in oil and is not impacted by the fall in commodities. Growth strengthened in 2016, reaching 7.6%, making the Indian economy the most dynamic in the world.

Mr Modi is progressing slowly in his reform objectives, due to a lack of majority in the parliament, but records successes notably on work flexibility in some regions and on the increased level of private investments, besides an impressive program of dematerialization / deletion of the principal banknotes bank had a negative impact at the end of 2016 and early 2017 but should be positive in the medium term by reducing the underground economy.

The government's program is aimed at developing the national industry which is still not very diversified and essentially 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 52% of GDP by employing about 25% of the labor force. The software industry is rapidly growing and boosting service exports and modernizing the Indian economy.

India is very dependent on its imports, particularly with regard to energy, and benefits from relatively low oil prices. India has begun catching up on China, with the advantage of being the largest democracy in the world (1.5m inhabitants) with a positioning on the advanced sectors.

The rise of infrastructure and foreign investment should contribute to the industrial take-off of the country as well as some ambitious tax reforms as "the single VAT", which should have a positive impact over time.