Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / India ETF INDA Defies EM Slump on Domestic Demand
Transcript
- Lucas: If you look at the emerging-market landscape right now, it's a sea of red — China ETFs getting hammered, the broader EEM barely positive over the past week. But there's one notable exception: India. The iShares MSCI India ETF, ticker i n d a, is up 0.3 percent in the last five days. That's not flashy, but considering the MSCI Emerging Markets index is down, it's a quiet outperformance. Luna: Right. Meanwhile, the China ETFs like FXI and MCHI are both down, and KWEB, the China internet ETF, dropped 2 percent. So what's India got that China doesn't? Lucas: A lot of it comes down to domestic demand. India is not nearly as exposed to the global trade cycle as China or Korea or Taiwan. Its economy is driven by consumption — a growing middle class spending on everything from two-wheelers to smartphones to financial services. So when the global trade picture gets murky, India tends to hold up better. Luna: And that trade picture is definitely murky. The trade-weighted dollar index hit 119.3 as of May 15 — up again. A stronger dollar usually spells trouble for EM assets, because it makes dollar-denominated debt more expensive and pulls capital back to the US. Lucas: Exactly. And India is less leveraged to that dynamic than, say, Turkey or Argentina. The rupee has been relatively stable — it's at about 83.5 per dollar, which is actually within its recent range. Compare that to the yuan, which the Chinese government is letting weaken gradually — it's at 6.81 per dollar now, down from 6.79 a week ago. That's a headwind for Chinese equities, but for India, it's less of a factor. Luna: So India is kind of a defensive play within EM right now. But is that performance sustainable? I mean, Indian equities aren't cheap — the Nifty 50 trades at around 22 times forward earnings, which is a premium to most EM peers. Lucas: It's definitely a premium. But the argument is that you're paying for quality and growth. India's GDP is still growing at around 6 to 7 percent, and corporate earnings have been pretty solid, especially in financials and IT services. The rally has been narrow — it's really been banks and tech services carrying the index. Manufacturing has been more sluggish. Luna: That narrowness is a concern. If you look at the INDA ETF, its top holdings are Reliance Industries, HDFC Bank, Infosys, ICICI Bank — these are big, established names. But the broader economy hasn't seen the kind of broad-based pickup that would justify a further rerating. Lucas: And that's the crux of the debate. On one hand, the structural story is intact: demographics, digitalization, formalization of the economy, the production-linked incentive schemes. On the other hand, the market is pricing in a lot of that already. The question is whether India can deliver earnings growth that justifies the multiple. Luna: There's also the policy angle. The Modi government has been pushing infrastructure spending — roads, railways, ports. But we've heard that story before. The actual execution has been mixed. Do you think that infrastructure push is real this time? Lucas: I think it's more real than it was five years ago. The government's capital expenditure outlay has increased significantly — it's up something like 30 percent year-over-year in the latest budget. And there's been a concerted effort to crowd in private investment. But the data on the ground is patchy. The construction sector is doing well, but industrial production has been volatile. Luna: So if I'm an investor looking at EM right now, the choice seems to be: Do I buy India at a premium, or do I try to bottom-fish in China, which is much cheaper but carries more macro risk? Lucas: That's exactly the dilemma. China's valuation is compelling — the MSCI China index is trading at around 10 times forward earnings. But the headwinds are serious: the property market hasn't stabilized, consumer confidence is weak, and the government's regulatory stance remains unpredictable. India doesn't have those problems, but you're paying 22 times earnings for the privilege. Luna: And India's not immune to global factors either. If the dollar keeps strengthening, eventually even India will feel the pinch. Foreign portfolio investors have been net sellers of Indian equities in recent months — not huge outflows, but the trend is worth noting. Lucas: Right. The data from the NSDL shows that foreign investors pulled about $2 billion out of Indian stocks in April. That's not a crisis, but it does suggest that the India story isn't bulletproof. If US interest rates stay higher for longer, liquidity conditions for EM broadly will tighten. Luna: So where does that leave us? Is INDA a buy here, or is it a hold? Lucas: I think it's more of a hold or a tactical overweight. If you're underweight India relative to its weight in the EM benchmark, it might make sense to add a bit. But I wouldn't go all-in at these levels. The risk-reward is balanced — you're getting stability and growth, but the margin of safety is thin because of the valuation. Luna: And what about the other EM markets that have been outperforming this week? South Korea's EWY is up 4.3 percent, Taiwan's EWT up 3.9 percent. That's a lot more than India's 0.3 percent. Lucas: Those are bounce-backs from a deep selloff. Korea and Taiwan got hammered earlier this year on concerns about semiconductor demand and geopolitical risk. So the rally this week is partly a relief rally. India didn't fall as much, so it didn't have as much to bounce back from. In a way, that's a sign of resilience, but it also means the easy gains have already been made. Luna: That's a good point. So maybe the real opportunity in India right now isn't the broad index, but selective stock-picking — focusing on domestic-facing sectors like financials, consumer goods, and healthcare that can compound regardless of the global environment. Lucas: Exactly. INDA gives you broad exposure, but if you're willing to be more active, you can find better risk-reward in specific names. For example, HDFC Bank has been a laggard this year — it's down about 5 percent — but its fundamentals are solid, and it's benefiting from the formalization of the economy. That's a stock that could re-rate if sentiment turns. Luna: And on the flip side, what's the biggest risk to the India story that nobody's talking about? Lucas: I'd say the risk of a domestic political shock. India has general elections due in 2029, which is a while away, but state elections happen every year, and if the opposition starts making gains, it could spook markets because investors associate the current government with pro-business reforms. Another risk is a sharp rise in oil prices — India imports about 85 percent of its oil, so higher crude is a direct tax on the economy. Luna: Oil has been volatile — it bounced around $80 a barrel recently, but if it spikes to $100, that would hurt India's trade balance and inflation. The RBI would have to keep rates higher for longer, which could slow growth. Lucas: Right. And that brings us back to the dollar. If the dollar index stays above 120, it's a headwind for all EM, including India. So while India is a relative safe harbor within EM, it's not a standalone safe haven. The broader macro environment still matters. Luna: So to wrap up: India's outperformance is real, it's driven by domestic demand and a structural growth story, but valuations are high and there are external risks. For investors, it's a market to own, but with caution. Lucas: I'd agree with that. And the key takeaway for listeners is that the India story isn't uniform — the quality of earnings matters, and the next leg of the rally will likely require broader participation from manufacturing and infrastructure. Until we see that, it's a market to watch closely, not chase blindly.