CHICAGO (Reuters) - Although the world's largest democracy has been hobbled by inflation, a declining currency and difficult business environment, the pro-business Bharatiya Janata Party that just won an epic election in India has engendered optimism that the country can turn around its sagging economic scenario.
It's time to increase your exposure to India's stock market.
The timing is good with equities in India perking up of late, something that isn't happening in the other "BRIC" emerging markets of Brazil, Russia and China.
The $1 billion WisdomTree India Earnings ETF, the largest exchange-traded fund investing in Indian stocks, has climbed 27 percent over the past 12 months through May 23 and is up 31 percent year-to-date. The fund holds large companies such as Reliance Industries Ltd, Infosys Ltd and Tata Motors Ltd. It charges 0.83 percent for annual management expenses.
For a play in smaller Indian companies, consider the Market Vectors India Small-Cap ETF, up nearly 40 percent over the past 12 months and nearly 55 percent year-to-date. It costs 0.93 percent annually for expenses and holds stocks such as Apollo Tyres Ltd, Ramco Cements Ltd and Hexaware Technologies Ltd.
Before digging in too deeply, be aware of the risks of investing in India. The bureaucratic business environment is tough to navigate, as well as corrupt. And the Indian economy is still sluggish - in the last fiscal year, growth slowed to a 10-year low of 4.5 percent from a high of 10.4 percent in 2010, according to The World Bank.
If new Prime Minister Narendra Modi can pull off a turnaround, demand will increase for banking services/credit, construction, consumer goods and vehicles. The Modi-led BJP government may also ramp up trade with China and other growing Asian economies.
Inflation, hovering around 10 percent, continues to hamper the Indian economy. The central bank has raised interest rates three times since September 2013. Along with a pronounced drop in the rupee against the U.S. dollar, the country has been stung by the U.S. Federal Reserve's pullback on its bond-buying stimulus, which had pumped billions into developing nations like India.
Neena Mishra, director of ETF Research for Zacks Investments in Chicago, sees India as a good long-term investment since renowned economist Raghuram Rajan took over as the governor of the central bank of India.
"The central bank has taken a number of positive steps in the past few months, towards bringing down inflation, liberalizing financial markets and strengthening the monetary policy framework," Mishra says.
Although tangible economic progress has been seen as slow to Western eyes, India's development and social progress is largely a success story that will accelerate if economic growth picks up.
More than 50 million people were lifted out of poverty as India's share of global domestic product rose from 1.8 percent to 2.7 percent, the World Bank reports. Growth is expected to increase to nearly 5 percent in the most recent fiscal year; to almost 6 percent in the 2014-2015 fiscal year; and 6.5 percent the following year. If those forecasts prove true, India would trail only China as the largest and fastest-growing developing country.
While India's reboot could take years, keep in mind stocks listed on Indian exchanges will continue to be volatile. The WisdomTree fund's returns, for example, have been all over the board. After climbing 95 percent and 20 percent in 2009 and 2010, respectively, the fund lost 40 percent in 2011 and 9 percent last year after gaining 25 percent in 2012.
That means India shouldn't dominate your global stock holdings, but represent a "satellite" position that includes other emerging economies.
Follow us @ReutersMoney or here; Editing by Beth Pinsker, Lauren Young and Nick Zieminski