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India exchange-traded funds softened Wednesday and Thursday after news that India hit multiple targets in Pakistan, but so far the weakness has been muted.
According to news reports, India’s military said these strikes were in response to a deadly attack in Indian-controlled Kashmir on April 22 and that they targeted “terrorist infrastructure” and were “focused, measured and non-escalatory in nature.” Pakistan, however, called Wednesday’s strikes “an act of war.”
INDA, India ETFs in Focus
The three biggest India ETFs by assets, the $9.1 billion iShares MSCI India ETF (INDA), the $3.1 billion WisdomTree India Earnings ETF (EPI) and the $2.1 billion Franklin FTSE India ETF (FLIN) were down about 1% on Wednesday and have started Thursday’s trading on a back foot. Stock markets in India were also down.
Many India-focused ETFs are flat to up on the year, with INDA up 2%, FLIN up 1.1% and EPI flat. Indian ETFs have had a strong run in the past few years as the country’s economy has boomed. On a five-year annualized basis, EPI is up 23.2%, FLIN rose 19% and INDA is up 17.7%.
Emerging Market Volatility
The volatility is a reminder that emerging market ETFs are often subject to higher geopolitical risk than developed market ETFs for a variety of reasons. However, the Kashmir area which borders India, Pakistan and China is one of the most volatile regions globally. All three countries will end up having minor skirmishes at times, and sometimes those escalate, said Aniket Ullal, head of ETF research and analytics at CFRA Research.
Ullal said the saber-rattling between the two countries bears watching, especially since both India and Pakistan have nuclear weapons. So far, investors don’t seem to be too worried about the situation, he added.
“India and Pakistan have always found a way to kind of navigate the conflict, and I think there's too much economically at stake for both players to escalate it beyond a certain point, unless something unpredictable happens,” he said.
Ullal pointed to 2019, when India struck Pakistan in response to a bombing in Kashmir and Pakistan retaliated with its own airstrikes, according to news reports. At that time, the reaction in the stock markets was not overly bearish.
India Growth Prospects
If investors can stomach some geopolitical risk, Ullal said India has the potential for both short-term and long-term growth.
Compared to other emerging markets, it has better domestic growth. And in the long term, it may be a beneficiary of the tariff regime under the Trump administration, which targets China more than other countries, he said. That could take longer to play out, he added.