INDA: Brace For India's Post-Election Upside

seekingalpha05-04

India has cleared quite a few milestones through PM Modi's last two terms.A third term, now well within reach, bodes well for equity performance over the next five years.On balance, INDA continues to ...

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This trend has only accelerated since Prime Minister Modi and his 'Bharatiya Janata Party' (also the 'BJP') took the helm in 2014. The results speak for themselves - after ten years of >10% annualized total returns, India is now the fifth largest equity market in the world, with a market capitalization exceeding $4 trillion. Bloomberg It should come as no surprise then that markets have been so bullish in the lead-up to election season, particularly with opinion polls suggesting that PM Modi is poised to be rewarded with his strongest mandate yet. Getting to PM Modi's '400 paar' target isn't just symbolic; it also paves the way for more market-friendly reforms (think ease of doing business) over the next five years, albeit at a faster pace and bigger scale than ever before.  In this context, recent news that a first 100-day agenda is now in the works ahead of June's final election results is very positive. Any confirmation of an accelerated reform push or a step up in capex outlays, both of which would imply a higher GDP growth trend through the next five years, would be a major positive catalyst for markets. Historically, nominal GDP growth has translated into corporate earnings and equity returns; hence, with India on track to become a $10 trillion economy by 2035, I expect stocks should also do very well. Times of India Yes, investors have also begun to catch on to the India growth story, as reflected in rising MSCI India valuations at ~23x forward P/E currently. It's worth keeping in mind, though, that Indian large-caps also grew earnings at ~27% in 2023 and, per consensus numbers, will sustain a further low to mid-teens % earnings growth through 2025. While not the fastest horse in the race, iShares' MSCI India ETF (BATS:INDA), the largest and most liquid US-listed Indian large-cap tracker, continues to stand out as the premier 'no-frills' India play. In line with my prior coverage of INDA (see INDA: A Steeper But Not Unreasonable Price For India's Growth Story), I remain upbeat heading into June's election results and the subsequent post-election phase. Data by YCharts INDA Overview - Key Advantages Intact; Still the Ideal' Middle Ground' Option The iShares MSCI India ETF remains the largest ($9.7bn assets) and most liquid (~2bps bid/ask) Indian tracker fund by a hefty margin. It's also the only major ETF that tracks the MSCI India index, a key benchmark for most investment managers. Along with the fund's best-in-class distribution, I don't see its size and liquidity advantage being disrupted anytime soon. iShares Relatively speaking, investors do also give up a bit, though, in terms of fees (0.65% expense ratio vs 0.19% for key comparable, the Franklin FTSE India ETF (FLIN)). INDA's other key difference relative to key peer FLIN is its slightly more concentrated portfolio - a result of its looser weightage caps. At the sector level, this means INDA is, like the MSCI India index it tracks, relatively overweight on its largest sectors (Financials, Consumer Discretionary, Energy, and Information Technology) but also underweight smaller sectors (Materials, Utilities, Health Care, Communication, and Real Estate). That said, INDA is also far less concentrated than the iShares' other flagship Nifty 50 index tracker, the India 50 ETF (INDY). Hence, those looking for a 'middle ground' will find a lot to like with INDA. iShares INDA's philosophy is similarly reflected in its single-stock profile, which also occupies a middle ground between the two other large-cap trackers, INDY and FLIN. That said, there has been some reshuffling since last quarter, with ICICI Bank (IBN) now the second-largest holding at 5.5%, in place of IT services company Infosys (INFY). The other key INDA holdings remain intact, with conglomerate Reliance Industries (RLNIY) still the largest holding (albeit at a slightly lower 8.2%) and both HDFC Bank (HDB) and Tata Consultancy Services (TTNQY) rounding up the top five. iShares INDA Performance - Accuracy Over Speed Over the last year, investors in INDA have been especially well-rewarded, with a further+8.0% year-to-date raising the total one-year return to +31.2% (+31.3% in market price terms). Zooming out, such returns, while above trend, aren't unusual for INDA - note INDA has also compounded at a region-leading +9.6% and +8.3% pace over the last five and ten years, respectively. More impressive, though, is the consistency of these returns, with only one year of negative returns in the last five - despite some big headwinds (e.g., rate hikes and COVID disruptions). iShares On absolute performance, though, INDA lags many of its Indian large-cap tracker funds. FLIN, for instance, has annualized one or two percentage points higher over the last decade, while large-cap factor ETFs like Invesco's India ETF (PIN) have outperformed by an even bigger margin. Investors looking for even more of a performance boost should consider India's small/mid-caps, for instance, via the pure-play iShares MSCI India Small-Cap ETF (SMIN) or WisdomTree's India Earnings Fund (EPI), a factor ETF with a 75/25 large cap to small/mid-cap split. Data by YCharts Where INDA shines, on the other hand, is the manager's ability to maintain a best-in-class tracking error (i.e., the fund's delta vs its benchmark) relative to the MSCI India index. In bull markets, this delta can be especially wide - over the last year, for instance, INDA investors have given up over five percentage points of performance vs MSCI India. But also consider that FLIN and EPI investors have given up seven to eight percentage points of relative one-year performance, vs their respective benchmarks. iShares Expect this gap to continue to be an issue, as regulatory treatment of foreign capital shows little sign of improvement in India. In the meantime, foreign investors will simply have to eat the impact of transaction costs, capital gains taxes (accrued in fund NAV calculations), and currency fluctuations. For investors who prioritize accuracy and execution over absolute performance, though, INDA ranks right at the top. Brace for India's Post-Election Upside India is currently in the midst of a general election, and all signs point to PM Modi gaining an even stronger mandate than before. This means a bigger reform push and an accelerated public-led investment cycle may be on the cards for the next five years - good news for both the economy (currently on track to hit $10tn by 2035) and corporate earnings. A rising tide should float a lot of boats, and INDA is no exception. Even if this fund isn't the fastest horse in this race, the 'no-frills' INDA more than compensates with its liquidity and consistently best-in-class tracking error. In the meantime, growing foreign inflows into Indian large-caps and continued earnings revisions (+27% in 2023; low to mid-teens % earnings growth through 2025) offer ample support for INDA's ~23x forward P/E.  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