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Next Steps for India?

The Rupees's One Way Slide - Is There a Silver Lining?

Too High or Too Low? Look at Tobin’s Q

Recent Changes in India – Impetus for ETF Growth?

To perform or not to perform…that is the question for the Indian PSU ?

Next Steps for India?

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John Davies

Managing Director, Global Head of Exchange Traded Products

S&P Dow Jones Indices

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It could be said that the ETF business has been a 20 year “overnight” success. Since the introduction of the first ETF back in 1993, we have seen a global expansion across multiple Exchanges and a diverse product offering. As at the end of July 2013, there were 3,441 ETFs, with 7,792 listings, assets of over US$2bn from 185 Providers on 55 Exchanges (Source:ETFGI). S&P Dow Jones Indices has been at the forefront of this phenomena licensing the underlying index for the very first ETF SPDR® S&P 500® ETF (SPY). Currently there are approximately US$595bn in ETFs linked to S&P Dow Jones Indices (Source:ETFGI).

Whilst the first ETF launched in India back in 2002, the Indian ETF market can still be considered nascent considering its relative position compared to the domestic Indian Mutual Fund Market. Currently there are 37 ETFs with approximately US$1.7bn in assets, which accounts for only 2% of the assets Indian Mutual Funds (Source:ETFGI). However, the number of ETFs has more than doubled in the last five years and there are now 15 Issuers in the market, providing access across the country’s two major Exchanges.

In addition, recent initiatives such as the ban of payment of distribution fees to financial advisers, greater requirement on transparency of fees and the lowering of the securities transaction tax fees on ETFs have levelled the playing field for usage of ETFs by retail investors. Institutional investors, such as Insurance Companies, are also seeing changes whereby regulation will allow increased investment allocations through ETFs. The recent announcement of the Government-led project to launch an ETF based on Public Sector Companies, the CPSE ETF, is further evidence of utilisation of the ETF structure. Looks like this could be the road ahead for index investing in India.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The Rupees's One Way Slide - Is There a Silver Lining?

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Lakshmi Iyer

Senior Vice President

Kotak Mahindra Asset Management

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In the past few weeks, most of the Indian treasury desks have taken on a war-room look. Too many events got crammed in relatively short time. Most of us know that Rupee has seen a near oneway slide against the dollar, losing nearly 26% in value in last 2 years. It’s but natural that RBI would react to this punter run. The question is, how effective would these measures be, in dissuading offshore transactions. For now, the banking system is scrounging for liquidity, which is increasing supply pressure on many asset classes.
It is clear that RBI’s intervention is aimed to stabilizing the Rupee rather than to regain lost ground; and thus arrest inflationary pressure.

And yes! There is a silver lining to this. If India is able to achieve foreign exchange stability and restrict inflation, we would have higher cost competency in dollar terms. This in turn should attract and induce higher FDI and domestic capital into the export oriented manufacturing sector over the period.

But what is required is that our policy makers are ready to realize this specter of opportunity, because India still ranks 132nd, behind even some of the war torn MENA countries. With the new growth ‘normal’ at around 5-5.5%, many of the entrepreneurs would not look at India until the cost of business in India is brought down. The markets would remain glued for the next policymaker move in this regard.

Indeed interesting times ahead.

S&P Dow Jones Indices is an independent third party provider of investable indices.  We do not sponsor, endorse, sell or promote any investment fund or other vehicle that is offered by third parties. The views and opinions of any third party contributor are his/her own and may not necessarily represent the views or opinions of S&P Dow Jones Indices or any of its affiliates.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Too High or Too Low? Look at Tobin’s Q

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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August was not the best of months in the stock market: the S&P 500 lost 3.1% and the Dow lost 4.4%.  This leaves investors wondering what’s next?

The stock market bounces up and down more often with more amplitude and less method to its madness than the rest of the economy.   If one could get past the noise in the market, there should be a financial measure of the economy’s value – an indicator that based on the financial data of the stock market and the value of the economy.  Tobin’s Q does this; it is the ratio of the market value of stocks to the replacement cost of their assets.  It was developed by James Tobin, a Nobel laureate economist some 25 years ago.  If one could buy all the assets of all the companies in the market for less than the market value of those companies, the companies would be over-valued and Tobin’s Q would be greater than one.  If the reverse – the cost of buying the assets of all the companies is greater than the market value – is the case, the market is under-valued.  From time to time, the stock market value of an oil company seems to lose any connection to the value of the company’s oil reserves.  If an oil company’s reserves are worth $30 billion while its market value is $10 billion, some analyst will suggest “drilling for oil on Wall Street” and Tobin’s Q for the company, assuming the only asset were the reserves,  would be one-third.

We can calculate Tobin’s Q for nonfinancial corporations in the US using data from the Federal Reserve’s Flow of Funds (FOF) database.   The FOF includes a consolidated balance sheet which shows both historic and replacement cost series and the market value of equities.  While the average level of Q over a very long time period should be one if the data are comprehensive, the average from 1952 to the first quarter of 2013 is a bit less at 0.74.

To make the chart easier to interpret, the series is normalized to average one over the entire time period.  The chart shows the three times since the 1950s when the S&P 500 lost about half of its value – 1973-4 Bear market, the aftermath of the Tech Boom and the financial crisis. Tobin’s Q warned about each of those.  As of the first quarter of this year, Q was moving higher. It is nowhere near as high as it was when the Tech stocks peaked, but it is back at levels seen before the financial crisis.

tobins q

Tobin’s Q is not the only market signal attracting attention.  The Financial Times wrote a long piece about CAPE – the cyclically adjusted P/E ratio developed by Robert Shiller, one of the developers of the S&P/Case-Shiller Home Price Indices. As the FT notes, there is a lot of debate about what CAPE is signaling. The paper also compares CAPE and Q.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Recent Changes in India – Impetus for ETF Growth?

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Anubhav Srivastava

Head - Product Development

Motilal Oswal Asset Management

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Since its inception a decade ago, ETFs’ in India have clocked significant growth. The number of ETFs’ and ETP listed has grown to 37 and are spread across Gold and Equity with a single money market ETF. While the assets are currently at $2bn, there are changes afoot which will see the ETF business undergo an important transformation over the next few years. A noteworthy change was the reduction in the Securities Transaction Tax (STT) for designated equity investments from 10 bps to 1 bp which reduced creation/ redemption/ trading costs and resulted in narrower spreads.

Retail Investment
In the past few years, Reserve Bank of India* and the SEBI*, have taken an initiative to promulgate an RDR-style regulation along with the advent of a commission free – direct share class (known as a ‘direct plan’). The regulation (SEBI Advisor Regulation) mandates registration of all intermediaries as either distributors (where they get paid by the manufacturer for distribution) or advisors (paid by clients for advice). For such advisors, ETFs’ make ideal building blocks for designing and managing investment pools including optimized asset allocation strategies to more sophisticated target date portfolios. The low cost ensures the returns are better and the transparency improves ex-ante risk management. An ETF based portfolio, therefore, becomes an attractive option for advisors who wish to efficiently manage client portfolios and charge an advisory fee (to offset revenue shortfall as a result of said advisory regulation).
Additionally, the government has introduced ISA (UK) /401K (US) type tax incentives which give retail investors a tax break on ETF investments. While the scheme is clearly targeted at attracting long term money to equity markets, it has the potential to introduce a hereto untapped segment.

Institutional Market Developments
At the moment, all insurance and pension funds are managed in house and list of eligible securities is small. For all such funds, additional restrictions apply including limiting 1.5% of the portfolio for mutual fund investments (including ETF) and a prohibition on investing in parent company shares. This prevents fund managers access to inexpensive beta exposures and even manager selection. Proposed changes to the Insurance and Pension Fund (and Mutual Fund regulations) regulation envisages allowing all three categories to invest into ETFs’. This would open up a $400 bn growing market for ETF manufacturers. While domestic ETF cater to the demand for wider market exposure and as elements in quantitative strategies, foreign ETFs’ will be required to diversify portfolios.

Given these changes and the launch of the government promoted Central Public Sector Enterprise (CPSE) ETF one can expect to see a proliferation of both domestic and foreign ETFs’.

*Note:
Reserve Bank of India regulates the bond and money markets (and consequently, banks)
Securities and Exchanges Board of India regulates the capital markets
Insurance Regulatory and Development Authority regulates Insurance Companies and Funds
Pension Fund Regulatory and Development Authority regulates all government and private pension funds
Forward Markets Commission regulates all commodity markets

S&P Dow Jones Indices is an independent third party provider of investable indices.  We do not sponsor, endorse, sell or promote any investment fund or other vehicle that is offered by third parties. The views and opinions of any third party contributor are his/her own and may not necessarily represent the views or opinions of S&P Dow Jones Indices or any of its affiliates.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

To perform or not to perform…that is the question for the Indian PSU ?

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Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices

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The notion of an investment in equity of a public sector undertaking may appear to be a very stable investment with long term growth opportunity especially in developing countries like India. However if we explore the performance of the S&P BSE PSU with S&P BSE SENSEX in a five year horizon, the picture turns out to be a little different. S&P BSE PSU represents approximately 20% by full market capitalization of S&P BSE 500.
As on July 31, 2013 there is a huge gap between the year to date cumulative returns given by S&P BSE SENSEX (-0.42%) and S&P BSE PSU (-25.70%). On analyzing the returns for a five year period, S&P BSE SENSEX has given an annualized return of 6.15% whereas S&P BSE PSU has given -4.06%. The risk percentage per annum has also remained low in S&P BSE SENSEX as compared to S&P BSE PSU. Table 1 below summarizes the statistics of both the indices for a period of five year ending July 31, 2013.

Performance of India PSU_Graph_Utkarsh

S&P BSE SENSEX also consists of six PSU stocks out of which five have given negative annualized returns as on July 31, 2013.
Based on the above, we can conclude that most of the PSU’s have not been able to outperform the market.
Performance of India PSU_Graph_Utkarsh1

Source: S&P Dow Jones Indices and BSE Ltd. Data from July 31, 2008 to July 31, 2013. Index performance is based on price return index levels in INR. Past performance is not an indication of future results.

S&P Dow Jones Indices is an independent third party provider of investable indices.  We do not sponsor, endorse, sell or promote any investment fund or other vehicle that is offered by third parties. The views and opinions of any third party contributor are his/her own and may not necessarily represent the views or opinions of S&P Dow Jones Indices or any of its affiliates.

The posts on this blog are opinions, not advice. Please read our Disclaimers.