India’s roaring stock market, and funds that track it, get boost from cheap oil

Falling oil prices represent another boost for India’s impressive run for its stock market and funds that track that market — but advisers considering exposure to India need to keep in mind that the ride can be very volatile.

The concentrated category of India-sector mutual funds, as tracked by Morningstar Inc., has averaged a 55.4% 12-month return, ranging from a 36% gain by DMS India MidCap Index (DAIMX) to a 74% gain by the Matthews India Investor (MINDX).

Year-to-date through Nov. 24, the single-country category of just six distinct class mutual funds, averaged a 45% gain, ranging from a 27% gain for DMS India MidCap to a 64% gain for Matthews India Investor.There are $1.4B in assets in the category, $984 million of which is in the Matthews fund.

The MSCI EAFE, by comparison, is up 0.4% over the trailing 12 months, and is down 1.9% since the start of the year.

Morningstar analyst Patricia Oey, while underscoring the risks associated with a country such as India, confirmed that the downward pressure on oil prices could mark the third stage of a rally for the emerging economy’s stock market.

“The government of India provides a lot of oil subsidies so that it can be sold domestically at a lower price,” she said. “But India also has a high current account deficit, and lower oil prices helps that deficit, which is good for India’s budget.”

In some respects, the 30% drop in crude oil prices since July represents the next driver for India’s economy and stock market.

As Ms. Oey explained, that run started as a sentiment-driven rally that had India shining above less-attractive emerging markets such as Russia, China and Brazil. India also benefited from the frothy level of U.S. equities, she said. That momentum was supported in May by the election of a reform-oriented prime minister, Narendra Modi.

“The new prime minister is more market driven and is pushing through reforms,” Ms. Oey said. “India is a democracy, but it’s a big country that tends to have a populous government, and there are subsidies for things like food and oil.”

The lower oil prices help India’s government deal with some of those challenges by taking some of the financial burden off the oil subsidies. Cheaper oil also introduces a trickle-down effect on inflationary pressure on food and other commodities.

“Now the central bank in India is more likely to reduce interest rates because they will be less worried about inflation,” Ms. Oey said.

While the India story appears to have some room to run, Ms. Oey warned that investors should realize India can be a volatile economy and stock market.

Mutual funds offering single-country exposure to India’s stock market averaged an 11.2% drop last year, following a 29.7% gain in 2012, which followed a 35.5% drop in 2011.

“We don’t think there are a lot of individual investors with a lot of concentrated exposure to India,” Ms. Oey said. “Most investors have just 5% allocated to the emerging markets, so anyone investing in these India funds probably really knows India well.”

For passive exposure to India, Ms. Oey recommends iShares MSCI India (INDA), which is up 29% from the start of the year. Among the actively managed funds, she recommends the three-star rated Matthews India Investor fund.

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