Prime Minister Narendra Modi’s political party won India’s general election last May with the promise of reform and growth. The country has faced its share of obstacles in the past decade, ranging from economic and political dysfunction to decreases in productivity.
However, India and global investors believe he’s the man that can steer the government in the right direction by taking advantage of the inflow of foreign investment and favorable demographics.
If Modi is anywhere near as good as promised, India will become a profitable endeavor for decades to come.
And one of the best ways to tap this potential is the EGShares India Consumer ETF (NYSEARCA:INCO)
India ETFs: Belief in the New Government
Since 2004, India has created its own economic and political headwinds. An economy that was once booming has been slowed by stagflation, large deficits and a host of corruption scandals. Government dysfunction — and the uncertainty it has created — has scared foreign investors from the Indian economy.
However, Modi brings with him a pro-growth resume. The western Indian state of Gujarat saw its economy triple over 12 years of Modi leadership. According to The Economist, “With just 5% of India’s population and 6% of its land mass, it accounts for 7.6% of its GDP, almost a tenth of its workforce, and 22% of its exports.”
During his tenure in Gujarat, Modi was known to be business-friendly and above reproach when it came to corruption. It will not be all smooth sailing for Modi as he has to deal with the hand dealt to him by previous governments. But, if he can do for all of India what he did for Gujarat, investors will be pleased with the returns.
India ETFs: India’s Growth Potential
Back in January of this year, the International Monetary Fund lowered global growth forecasts for 2015 by 0.3%, to 3.5%. However, India’s economic outlook remained for the most part unchanged.
India is expected to grow at 6.3% this year and 6.5% in 2016 — when it is likely to surpass China’s forecasted growth rate of 6.3%.
A new business-friendly regime and upwards of 6% growth has been the driver of the bullish Indian market since last May’s elections. The market may be ahead of fundamentals, but it’s understandable when you take into account the planned government investments into sectors such as manufacturing and infrastructure.
According to Patricia Ribeiro, who co-manages the American Century Emerging Markets Fund:
“The economy is expected to pick up from here, and should increase in the second half of the year. The government is pushing reforms, and some of that should mean a big improvement in earnings.”
If you want to invest in the broad scope of the Indian economy, these three India ETFs are on fire. For the 12-month period ending Jan. 30, the iShares MSCI India ETF (BATS:INDA) is up 38%, the WisdomTree India Earnings Fund ETF (NYSEARCA:EPI) is up 46% and the iShares S&P India Nifty 50 Index Fund (NASDAQ:INDY) is up 47%.
India ETFs: Demographics Tell the Story
What may be the most lucrative long-term play on India is betting on its demographic growth. India is the second-most populated country on Earth and its projected to take the No. 1 spot by 2025. Over the next decade the country will contribute an additional 124 million people to the global labor pool. That translates to India accounting for almost 25% of the increase in the world’s working-age population.
Modi has also launched a new ambitious national program called “Make in India.” It is an attempt to bring in more foreign investment, cultivate innovation and create a best-in-class manufacturing infrastructure among other things.
It is possible — especially with his track record — that domestic economic growth programs and government reform could transform the growing number of workers into a burgeoning middle class who are ready to spend a lot of discretionary dollars.
So how would you take advantage of this exploding consumer market?
I believe the INCO ETF fits the bill. INCO tracks the Indxx India Consumer Index that takes a looks at the consumer industry of India. The fund allocates 80% of its asset base to consumer goods. The rest is divvied up between industrials (15%) and consumer services (5%) sectors.
Since Modi’s general election win, INCO has added more than 34%.
As India’s skyrocketing middle-class demographic becomes better educated and makes more discretionary dollars, expect INCO to give you solid returns as a long-term play.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.