IFN - IFN: Bullish Long-Term Catalysts In India Sustainable High Yield

2023-05-08 02:10:59 ET

Summary

• India is set to overtake China in population as more appealing economic conditions are conducive to capitalism and growth.
• I see an upside ahead in IFN on a total return basis, and a price breakout could be in store later this year.
• With a high yield and an improving growth outlook as Asia reopens, I reiterate my buy rating.

International Financials have surged compared to domestic banks. I was floored when I saw the through-the-roof relative performance of the iShares Global Financials ETF ( IXG ) versus the SPDR S&P Bank ETF ( KBE ). After a yearslong stretch of negative alpha, IXG is at all-time total return highs versus US banks.

Now you might ask, 'What does this have to do with Indian stocks?' The India Fund ( IFN ) has nearly one-third of its allocation in the Financials sector. With a weakening U.S. dollar, it's possible that fund flows could favor non-U.S. stocks as regional banking turmoil persists.

Getting down to the brass tacks, I reiterate my buy rating on IFN. Let's give this high-yield CEF a refresh.

Global Financials Sharply Outperform US Banks In 2023

According to the issuer , IFN invests for long-term capital appreciation, which it seeks to achieve by investing primarily in the equity securities of Indian companies. As of March 31, the CEF features a high 1.08% annual net expense ratio, but that's not particularly lofty compared to other CEFs. Net assets are $463 million, and the fund has a nearly 30-year track record, realizing greater than 8% compounded returns since 1994.

India will shortly overtake China as the world's most populous country. And a relatively stable macro landscape compared to China makes it a compelling nation in which to do business. Just recently, Apple (AAPL) underscored its plans to penetrate India with its presence. Growing government spending and a consumer revival post-COVID are bullish catalysts, according to the fund manager's Q4 commentary .

IFN attracts investors with its very high 22.9% trailing 12-month distribution yield. The November 2021 total payout of $1.61 was unusually high, so I would expect a forward yield closer to 12%.

IFN Distribution History

Performance-wise, IFN has outpaced both the iShares MSCI India ETF ( INDA ) and the iShares India 50 ETF ( INDY ) in the last decade. On a total return basis, IFN is not far from its highest level since early last year after notching a nadir in June 2022. I like this relative strength (dividends included) against its peer ETFs.

IFN: Long-Term Alpha vs. INDA and INDY

Digging into the portfolio, IFN is very much a large-cap fund. It also leans to the growth style, according to the Morningstar Style Box. The CEF features decent momentum, and the portfolio is of higher-than-average quality with low volatility. The price-to-earnings ratio is not cheap at more than 22 but long-term earnings growth is decent at 8.5%.

IFN: Portfolio and Factor Profile

A key risk for IFN holders is that it is quite concentrated. The top 10 holdings total 56% of the portfolio. Also - as hinted at earlier - Financials comprise 29% of the fund (the largest sector weight). IFN counters the large bank position with almost a 20% weight in growth-oriented Information Technology and Consumer Discretionary stocks, however.

IFN: Top 10 Holdings, Sector Weights

In this update on IFN, I took a look for the first time at seasonality. According to data from Equity Clock , IFN tends to rally big from mid-May through year-end. So, now's historically an ideal time to own the fund.

IFN: The Most Bullish Time of Year

The Technical Take

Doing robust chart analysis is always important, but it is made all the more difficult when the asset has such a high dividend yield. Still, a bullish price breakout is even more impactful when it happens. And I see the potential for IFN to break out of a bullish descending wedge pattern. Notice in the chart below that the CEF has support at a downtrend line dating back to June of last year while upside resistance is seen from a downtrend line off the August zenith. With a flattening 200-day moving average, the bears are losing their grip.

I also spotted a bullish move in the RSI momentum index at the top of the chart. With a rally to finish last week, the bulls appear to be taking IFN to another test of the 200-day. A close above $17 would help confirm a bearish to bullish reversal. I will also be watching how relative price strength goes in the coming months - a breakout above the October 2021 peak would be another sanguine share move. Overall, I like the signatures, but waiting for a rally above the 200-day is warranted. Also, buying the dip to trendline support, currently in the low $14s is prudent.

IFN: Shares Nearing 200-Day Resistance, Strong RSI

The Bottom Line

I continue to like the performance and construction of IFN. The technicals also look better, and a breakout this summer amid better seasonality could help send the CEF higher.

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