Despite India’s economy being relatively hard hit by COVID-19 over the past year, its stock market has been among the strongest performers. Helping underpin the Indian market outlook has been continued strong growth in the economy and corporate earnings. Indian companies that score highly on ‘quality’ metrics such as return on equity have also continued to demonstrate their relatively good performance within the Indian market.
India’s strong economic outlook
As evident in the chart below, India has so far suffered through two COVID waves – the most recent peaking around June this year. The easing in COVID cases and deaths (albeit likely to be understated in official statistics) offers hope that the economy can once again rebound in coming quarters. One lingering challenge is vaccinations – while around half the population has had their first dose, only around 20% are fully vaccinated. The Government’s aim is to have all willing adults fully vaccinated by year end.
As seen in the chart below, the Indian economy bounced back strongly through the second half of last year, though quarterly GDP estimates suggest there was a moderate relapse in the June quarter of 2021. All the same, GDP last quarter was still 30% above the lows in the June quarter of 2020. As also evident, prior to the COVID crisis, the Indian economy was one of the fastest growing in the world, with annual GDP growth consistently above 10%. According to Reserve Bank of India forecasts, the economy is expected to grow by 9.5% in the financial year ending March 2022.
As we’ve previously outlined, India’s relatively young and strongly growing population – along with still low levels of per capita GDP – supports the potential for continued growth in the economy over the year ahead, which in turn bodes well for growth in corporate earnings and stock market returns. India is a functioning democracy and English – the language of global capitalism – is widely spoken among its professional workforce.
IIND ETF: Access to India’s stock market performance
India’s stock market has performed strongly over the past year, continuing a trend of relatively good performance over the past decade or so. The index of listed Indian companies that the BetaShares India Quality ETF (ASX Code: IIND) aims to track returned 64.9% from end-February 2020 to end-September 2021, compared with 36.1% for the MSCI All-Country World Index (both in $A terms).
Over the past 5-years to end-September 2021, IIND’s Index has returned 15.7% p.a., compared with 12.5% p.a. for the MSCI All-Country World Index (both in $A terms).
Source: Bloomberg. Total return indices (in local currency) based to 100 at 30 June 2008. Shows performance of index, not ETF, and does not take into account ETF’s fees and costs. You can’t invest directly in an index. Past performance is not indicative of future performance of any index or ETF. IIND’s returns can be expected to be more volatile (i.e. vary up and down) than a broad global shares exposure, given its concentrated country exposure.
According to recent Goldman Sachs analysis, India’s share market is forecast to enjoy a strong inflow of new investor capital and share market listings over the next few years, such that its overall market capitalisation could rise from US$3.5 trillion to $5 trillion by 2024 – which would make it the fifth-largest stock market in the world*.
What’s more, as evident in the chart below, IIND’s index historically has outperformed not only global markets, but also other widely-followed Indian equity benchmarks, namely the MSCI India Index and the Nifty-50 Index – that adopt a traditional market-cap weighting approach.
Source: Bloomberg. Total return indices in $A terms. Shows performance of index, not ETF, and does not take into account ETF’s fees and costs. You can’t invest directly in an index. Past performance is not indicative of future performance of any index or ETF. IIND’s returns can be expected to be more volatile (i.e. vary up and down) than a broad global shares exposure, given its concentrated country exposure.
This historical outperformance of traditional Indian equity benchmarks may be attributed to the greater exposure that IIND’s index provides to some of the potentially more dynamic mid-cap stocks within the highly concentrated and top-heavy Indian market.
IIND’s index applies a ‘quality’ screen, whereby it attaches greater weight to stocks that have attractive financial metrics in areas such as earnings growth, return on equity and debt levels. That compares with traditional indexing approaches that weight stocks according to their market capitalisation. The quality factor has long been recognised as a ‘smart beta’ indexing approach that can lead to improved return performance in some markets over time, which is why we also offer the BetaShares Global Quality Leader ETF (available in both currency-hedged (HQLT) and unhedged (QLTY) form).
As one example of this potentially more dynamic tilt, it’s worth noting IIND’s index currently has around 24% accounted for by India’s technology sector, compared to 18% in the Nifty 50 and MSCI Index indices**.
* Goldman Sees Indian Share Market Rising to World’s Fifth Biggest, Bloomberg News., September 20, 2021.
** As at 30 September 2021. Subject to change.
There are risks associated with an investment in IIND, QLTY and HQLT, including market risk, index methodology risk, international investment risk, concentration risk, currency risk (for IIND and QLTY) and currency hedging risk (for HQLT). For more information on risks and other features of each fund, please see the relevant PDS, available at www.betashares.com.au. A Target Market Determination for each fund is also available at www.betashares.com.au/target-market-determinations. Each fund should only be considered as a component of a broader portfolio.