An Emerging Markets ETF Rebound Candidate For 2016
The Market Vectors Russia ETF Trust (NYSE:RSX), the largest exchange-traded fund tracking Russian stocks, is the only one of the four major ETFs tracking the BRIC economies currently sporting a year-to-date gain. However, that obfuscates a six-month slide of 18.7 percent.
Of the big single-country BRIC ETFs, the WisdomTree India Earnings Fund (ETF) (NYSE:EPI) is the second best this year, though it is in the red a year after India ETFs were the darlings of the BRIC bunch. Slack performances by Indian stocks are viewed as disappointing because, as a net importer of oil, Asia's third-largest economy was expected to benefit from lower crude prices.
Related Link: Why The Emerging Market Meltdown May Just Be Getting Started
The India Situation
India's central bank and its policymakers are taking steps to bolster the economy. In late September, the Reserve Bank of India surprisingly cut interest rates by 0.5 percent, the fourth consecutive meeting at which RBI has pared borrowing costs. Even with steadily declining interest rates, India's currency, the rupee, is healthy relative to other downtrodden emerging currencies.
India's Parliament, Policies And Tax Proposals
While India's parliament is still mulling various items of legislation, such as tax proposals that could make Asia's third-largest economy more attractive to foreign investors, it has been largely overlooked that recent proposals signed into law could help boost the fortunes of Indian equities and ETFs like EPI next year.
In the second week of November, Prime Minister Narendra Modis government relaxed foreign investment norms for 15 sectors, including construction projects, cable networks, agriculture (coffee, rubber, palm oil) and air transportation, in which the foreign caps have been raised to 100 percent for foreign direct investment (FDI). Other sectors such as defense and broadcast have been increased to 49 percent for FDI, said WisdomTree in a recent note.
Foreign Investor Access To India
Given EPI's current sector makeup, those changes could prove beneficial, as the industrial and telecom sectors combine for about 8 percent of the ETF's weight. Still, increasing foreign investors' access to Indian financial services firms is important for a myriad of reasons. At the ETF level, that is important because many India ETFs feature financial services stocks as their largest sector allocation. EPI is no exception, as financials command 24.4 percent of the ETF's weight nearly 600 basis points more than the fund devotes to its second-largest sector weight, energy.
In July of this year, the cabinet announced it was removing individual caps for foreign institutional investment (FII) and FDI to create a single composite cap of 74 percent, added WisdomTree, While FII is investment in liquidity market instruments such as equities (or bonds, mutual funds, the way our own exchange-traded Funds purchase shares), FDI, on the other hand, is foreign investment in long-term physical capacity such as setting up a factory.
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