India's Economic Winds Are Blowing Toward This Indian Infrastructure ETF

01/26/2015 5:48 pm EST


Jim Jubak

Founder and Editor,

The surprise move by the Reserve Bank of India to cut interest rates is not getting the attention it deserves, but MoneyShow's Jim Jubak thinks it's time to start, so he's putting some money into India's lagging infrastructure sector by adding shares of this ETF, as of today, January 26.

How about that other central bank?

With all the attention focused on the European Central Bank's plan to buy more than $1 trillion in government bonds, on how the shifts in policy at the People's Bank of China will speed up or slow down China's economy, on whether the Bank of Japan can revive growth and inflation, on when the US Federal Reserve will raise interest rates for the first time, the surprise move on January 15 by the Reserve Bank of India to cut interest rates hasn't gotten as much attention as it deserves from investors.

Here we've got the classic good news interest rate reduction: Inflation has tumbled and that has let the central bank cut interest rates, which will, in equally classic fashion, lead to an increase in economic growth.

Inflation measured at the consumer level rose at a 5% annual rate in December, up from 4.38% in November. Prices at the wholesale level, the measure preferred by the Reserve Bank of India, rose by 0.1% after a 0% increase in November. Industrial production climbed by 3.8% in November and is now up by 2.2% in the first eight months of the 2015 fiscal year versus a 0.1% increase in the first eight months of fiscal 2014.  India's economy is estimated to have grown by 5.5% in the fiscal year that ends in March 2015. That would put an end to two-years of sub-5% growth.

And the country's economy still has wind at its back thanks to falling oil prices (India imported $143 billion of oil in 2013), more interest rate cuts (the initial reduction of 0.25 percentage points left the Reserve Bank of India's benchmark rate at 7.75%), favorable demographics (India is now collecting the same demographic bonus that had helped propel growth in China), and structural changes from the Indian government intended to improve business conditions by improving infrastructure and ease barriers to doing business in the country. In a year when growth in China is slowing, both the World Bank and the International Monetary Fund see the Indian economy accelerating. The World Bank, for example, forecasts GDP growth in India rising to 6.8% in fiscal 2016 and to 7% in fiscal 2017.

Indian stocks have been on a tear in anticipation of these current and future trends. Mumbai's Sensex Index is at an all time high, with a 37.8% gain over the last 12 months and a 5.5% gain in 2015 through January 22.

These trends are why I added the New York traded ADRs of HDFC Bank (HDB) to my Jubak's Picks portfolio on November 18, 2014. That pick is up by 16.7% from that date through January 26.

But not all sectors of the Indian market have moved up as strongly and now-on interest rate cuts and prospects for more business friendly rules and investment in the government budget that will be introduced next month for the fiscal year that begins in April-I think it's time to put some more money into India and into the lagging-but about to catch up-infrastructure sector.

You know what companies you want to buy. Adani Ports. Ambuja Cement. Bharti Airtel. Reliance Infrastructure.

The problem is that almost no Indian infrastructure companies sell via ADRs in New York.

The solution is an ETF such as EGShares India Infrastructure ETF (INXX). The fund is relatively small at $45 million in net assets, but volume is a decent daily average of 60,000 shares. (I think that would be light for a core holding, but that's not the portfolio role I see for this ETF.) The ETF was up 19.3% in 2014 and was up 8.9% in 2015 as of January 22. It closed at $13.83 on January 26.

The names in the portfolio are all those I think you're looking for. Besides the infrastructure companies I mentioned above-all owned by the ETF-you'll get exposure to companies such as Cummins India and Tata Communications.

I'm adding this ETF to my 12-18 month Jubak's Picks portfolio today with a target price of $17.50 by October 2015.

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