Look closely at India when Looking at the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM)

The bromance between India’s Prime Minister Narendra Modi and President Barack Obama has brought the world’s two largest democracies closer than ever. They plan to visit each other more and they even established a Modi-Obama hotline -- an unprecedented means of connecting the two countries. A strengthening India-U.S. alliance will boost trade between the two countries, benefitting Indian citizens and foreign investors alike. At the same time, the country is saving billions of dollars from cheap oil -- a major import that the government heavily subsidizes. Considering that government capital expenditures are at multi-decade lows, there’s plenty more upside potential for spending to flow to government contractors.

The WisdomTree India Earnings Fund (ETF) (NYSEARCA:EPI) added 8% year to date (through Feb. 17) vs. 3% for iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) and 5% for iShares MSCI EAFE Index Fund (ETF) (NYSEARCA:EFA), a benchmark for foreign-developed markets. Ishares MSCI India ETF (BATS:INDA) gained 10% year to date, according to Morningstar.

During Obama’s three-day visit in late January, the two leaders agreed to join forces in developing aircraft carrier and jet engine technology and producing small-scale surveillance drones. The two countries also intend to cooperate on equipment production for Lockheed Martin Corp’s C-130 transport plane.  Over the last five years, 75% percent of India's arms imports have come from Russia. Even though the U.S. is the second-largest seller of arms to India, it has only accounted for 7% of India's arms imports over the last five years. India wants to reduce its dependence on Russia and turn to its new buddy to fill that void.  

Although India’s military capabilities lag far behind arch-rival China’s, it aspires to become a global military superpower. India accounted for 14% of the world's arms imports as of March 2014, according to the Stockholm International Peace Institute. India increased the maximum foreign-ownership level in military and defense companies to 49% from a former limit of 26% last year in hopes of attracting more foreign direct investments and industry expertise. The India-U.S. defense partnership is in its infancy. Investors should expect more dollars to start flowing into this industry.

India is competing with China to win approval to build infrastructure projects in surrounding countries. It’s doing all it can to free up government funds for infrastructure investment. Food Minister Shanta Kumar has submitted a proposal to reduce the percentage of the population that receives wheat and rice subsidies from 67% to 40%, saving India $6.5 billion a year. With oil costing less than $65 a barrel, India is saving $45 billion a year, Credit Suisse wrote in an investment strategy report released Jan. 27. The government can invest the savings on capital expenditures, which hover at multi-decade lows. It will most likely build highways, railways, housing, rural roads, defense projects and renewable energy. Government spending could raise capex to 1.2% of gross domestic product in fiscal year 2016, says Credit Suisse.

“Construction share of GDP is at decade lows as impaired balance sheets and regulatory issues have slowed private sector capex,” Credit Suisse wrote. “With the government clearing regulatory roadblocks and also issuing EPC (engineering, procurement and construction) contracts, not only does construction activity pick up, balance sheets of contractors are likely to improve as well.”

India aims to generate 63,000 megawatts of nuclear power by 2032 -- a 14-fold increase from today. Obama said the U.S. stands ready to help with India’s plan to increase solar energy installations fivefold by 2022. Some estimate the ambitious plan would cost $160 billion.

Although no official trade deals occurred between the U.S. and India during Obama’s visit, the U.S. has a stated goal of reaching $500 billion in trade with India. India’s young and rapidly growing population are hungry for Western goods. India tops the list (along with Saudi Arabia) of countries where TV revenue is predicted to grow the fastest from 2013-2018 with a 16% compound annual growth rate, according to PricewaterhouseCoopers. Roughly half of India’s 250 million households have pay-TV subscriptions. That’s expected to increase quickly as the middle class grows.

Year-to-date capital inflows have reached $1.2 billion (the second highest among eight Asian markets tracked by Bloomberg, after Taiwan) as the Sensex breaks records. Even after last year’s rally, India trades a modest premium of 13% over global equities -- a far cry from the 40% premium seen in 2010 and 80% in 2007, according to Credit Suisse.

Morgan Stanley upgraded its rating on India to overweight in late January, Barron’s reported. India’s return on equity has turned around from multi-year low to 16.3% -- 38% higher than the emerging markets average. ROE measures a company’s profitability given the amount of money shareholders have invested. The higher the ROE, the better.

by Jesse Frehling, political economic analyst at Focused Wealth Management and contributor to Stock Traders Daily.

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