Rajan’s Impact On the Local Stock Market – Biased Insight Into India ETFs

On August 6, 2013 it was announced that Dr. Raghuram Govinda Rajan would take over as the next RBI Governor. He was appointed RBI Governor for a term of 3 years succeeding D Subbarao whose term ended on 4 September 2013.

Rajan is an extraordinary personality and a modern high profile economy scholar. During May 2012, Rajan and Paul Krugman (Nobel Memorial Prize in Economics) expressed alternate views on how to reinvigorate the economies in the U.S. and Europe, with Krugman mentioning Rajan by name in an opinion editorial.

Rajan, also was awarded the fifth Deutsche Bank Prize for Financial Economics 2013 on 26 September 2013 for his “ground-breaking research work which influenced financial and macro-economic policies around the world“. He was conferred the Best Central Bank Governor award for 2014 by Euromoney Magazine.

The RBI Governor post granted to Rajan was a great choice for the India’s future, economic development and stock market. The iShares S&P India Nifty 50 Index Fund (INDY) made gains of around 65% since Rajan took over the RBI Governor post. Also this amazing result would not be achieved without the victory of Narendra Damodardas Modi’s BJP party and his appointment as a new prime minister of India. Since his appointment Modi has been introducing measures to make the economy more efficient and competitive. He also promised to tackle corruption and bring back funds illegally transferred outside India in order to avoid tax [Illicit Deposits Abroad Cost India Billions of Dollars in Lost Revenue: Narendra Modi].

Courtesy of StockCharts

The India stock market delivered breathtaking results also on a relative basis vs. global emerging markets and has been one of the best performing equity asset classes.

Below is the price ratio of the INDY relative to the iShares MSCI EM ETF (EEM). As a reminder, a rising price ratio means the numerator/INDY is outperforming (up more / down less) the denominator/EEM.

Courtesy of StockCharts

Since Rajan’s appointment the INDY ETF has outperformed the EEM ETF by around 50% during the period of time slightly longer than a year! Investors clearly gained confidence in the country and money started pouring into the local stock market. Rajan and Modi together set the direction towards a great pro economic and business friendly environment. Thanks for that, investors have started seeing many opportunities in the biggest democracy of the world.

The INDY performance puts smile on investors’ faces, however let’s not forget this index fund is only a passive fund which replicates the performance of the Nifty 50 Index. So, are there any better ETFs on the market which delivered even more compelling results than the INDY?  The answer is yes.

The first one worth scrutinizing briefly is the Market Vectors India Small-Cap Index ETF (SCIF). Many investors consider India as a risky asset allocation and buying the generic Nifty 50 Index is the maximum amount of risk they are ready to take. However, potential opportunities lie where there is more risk. India small caps tend to be more volatile (and that’s normal) vs. the volatile India large and mid caps. On top of that the small caps are less liquid, therefore they are much more difficult to trade and sell during distressed market conditions.

Below is the price ratio of the SCIF relative to the iShares S&P India Nifty 50 Index Fund (INDY). As a reminder, a rising price ratio means the numerator/SCIF is outperforming (up more / down less) the denominator/INDY.

Courtesy of StockCharts

Since Rajan’s taking the post of the RBI Governor the SCIF ETF has outperformed the INDY ETF by around 20%! Isn’t that amazing? That’s one of the proofs investors consider the current market direction as the right one and are ready to allocate more towards niche asset classes like the India small caps.

Dr. Raghuram G Rajan in 2004; Courtesy of Wikipedia

The second ETF which should be part of every investor’s portfolio is the WisdomTree India Earnings Fund (EPI).  This is the biggest India ETF with around $2.2bn AUM. The EPI seeks investment results that correspond to the price and yield performance, before fees and expenses, of the WisdomTree India Earnings Index, which is the WisdomTree’s proprietary index. The Index is a fundamentally weighted index that measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the index measurement date. Companies are weighted in the Index based on their earnings in their fiscal year prior to the Index measurement date adjusted for a factor that takes into account shares available to foreign investors. For these purposes, “earnings” are determined using a company’s net income.

Below is the price ratio of the EPI relative to the iShares S&P India Nifty 50 Index Fund (INDY). As a reminder, a rising price ratio means the numerator/EPI is outperforming (up more / down less) the denominator/INDY.

Courtesy of StockCharts

The WisdomTree ETF EPI has been ahead of the iShares INDY by around 4% since Rajan’s appointment as the RBI Governor.

Having scrutinized the ETFs which make most sense from different investor’s perspectives like: underlying index, innovation, alpha generation or liquidity, we should bear in mind that the India ETFs universe is much wider with some products offering leverage or exposure to themes like infrastructure. We are happy to elaborate on more specific niche ETF products upon special requests from our readers.

Courtesy of ETF DataBase

Sources: Wikipedia, Bloomberg, Reuters, iShares, Market Vectors, WisdomTree, ETF DataBase

ETFs: INDY, EEM, SCIF, EPI

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