GalaTime

With everyone and their grandmother commenting on the 0.25% rate cuts by the US Fed, thanks to Charles Kirk for creating a summary of the better commentary:

“Thinking as a trader, the most counter-intuitive outcome here would be a resumption of the Santa rally and run into year end. It’s just become my favored scenario, because it seems so outlandish after the Fed news.” - Alan Farley

“Dollars to donuts, perhaps literally, the FOMC couldn’t cut fitty without invoking the wrath of foreign holders of dollar denominated assets. As it is, we’re in a pretty pinch.” - Todd Harrison

• World Economic Forum: India @ Risk 2007

Six risk factors:

1) Economic Impact of Demographics – India is facing a demographic dividend. What must be done to ensure it does not turn into a
demographic liability? Can the “inequality trap” be overcome and inclusive growth achieved?

2) Loss of Freshwater (quantity and quality) – How best can India cope with increasing freshwater insecurity?

3) Economic Shocks and Oil Peaks – How vulnerable is India to external economic turbulence? What exogenous crises would risk derailing India’s growth prospects (e.g. an oil price shock)?

4) Geopolitical Risks: Globalization vs Protectionism – What happens if there is a backlash or retrenchment from globalization? With the explosion of expectations, can India keep up with its own aspirations?

5) Climate Change: The Environment and Challenges to India’s Growth – Can India balance the complex trade-offs between the environment and growth?

6) Societal Risks: Infectious Diseases – What must be done to combat the spread of high-mortality disease and pandemics? What if India fails?

• NakedShorts: An ETN behaving badly: iPath MSCI India (INP)

the iPath MSCI India ETN is trading at a premium fast heading toward 25% of its underlying value.

The discrepancy has developed since India’s securities regulator moved in October to limit the influx of overseas capital into its stock markets (via P-Notes), and the consequent appreciation of its currency.

Barclays suspended issuance, sales and lending of INP on Oct. 26, citing the need to clarify the nature and impact of the new SEBI restrictions; on Nov. 5 it reopened for business—although hardly.

So, Economics 101: continuing strong demand for INP, in the absence of normal gravitational forces such as new issuance, combined with the inability to borrow stock for shorting, has sent the shares into low earth orbit.

Ironically, the best-known US-listed closed-end funds are currently trading at a discount to their NAVs. Blackstone’s $2.24 billion (at Jun. 30) India Fund (IFN) carried a 7.8% discount on Friday, Dec. 7, according to Nuveen’s ETFConnect, while Morgan Stanley’s $1 billion India Investment Fund (IIF) was trading at a discount of just under 5%.

Binita Metha has put together a nice list of investment options for US residents interested in India:

“Here’s a quick summary of the funds and ETN . . .

• India Fund from Blackstone group (IFN): Expense ratio of 1.41%
• India Investment Fund from Morgan Stanley (IIF): Expense ratio of 1.35%
• Matthews India Fund (MINDX): Annual operating fee of 1.34%
• EATON Vance Greater India Fund (ETGIX): Expense ratio of 2.14%
• Barclay’s iPath India MSCI Exchange Traded Note (INP): Yearly fee of 0.89%”

I have covered ETFs (as well as ADRs) before, but not the mutual funds. Let’s see what Binita has in store for Part 2.

I wrote earlier about the relatively new iPath MSCI India ETN (INP) - here’s a detailed post from James Picerno of The Capital Spectator blog on the differences between exchange traded funds (ETFs) and exchange traded notes (ETNs).

• Most ETFs are built as investment companies á la mutual funds. As such, ETFs represent ownership in a basket of securities. ETNs, by contrast, are promises to deliver a return that tracks an index. To be precise, iPath ETNs are debt securities issued by Barclays —senior, unsecured, unsubordinated 30-year debt securities.
• ETNs, like any debt security, carry credit risk—a distinguishing characteristic absent in ETFs.
• Holding an ETN in a taxable account for more than a year can offer superior tax treatment relative to an identical trade with certain ETFs.

The one thing common between both is their (current & expected) spectacularly rapid growth!

A couple of interesting reads from Ajay Shah:

• Monetary policy at the cross-roads
  • Looks at the problems with the RBI’s policy - most of which have impacted its inability to tame inflation, and could lead to further interest rate jumps.
• Paper on Indian ADRs
  • Looks at “inter-sectoral and inter-temporal characteristics in prices of such stocks of Indian origin that are being dually traded on the American and Indian stock exchanges”.

A while back, I wondered about arbitrage opportunities for ADRs. Seems that the legalities & overhead involved in such strategies would wipe out most of the profit potential.

Now that US investors have several options to invest in India in the form of ETFs/ETNs such as IIF, IFN & INP, the action has moved to Australia - a new Indian fund will be launched over the next few weeks. Per its prospectus, the India Equities Fund Limited (IEF) is seeking to raise up to $200 million to invest in companies listed on the two major Indian stock markets - the BSE & the NSE.

Note:

• The portfolio, which will be unhedged, will be managed by British fund manager Kotak Mahindra.
• Both Kotak Mahindra and Olympus Funds Management will receive a performance fee of 20% of positive returns, but to earn this the fund will have to beat both its benchmarks: one an absolute return of 20% a year and the other to beat the BSE 200 index (measured in Australian dollars).
• . . . fund that is mostly blue-chip in nature, with up to 20% in mid-caps.

I also learned that Australian investors have had another option - Fidelity India Fund - since September 2005.

It’s worthwhile to compare the performance of the BSE Sensex 30 & NSE Nifty 50 market indices with that of the ETF/ETNs traded in the US, specifically:

• IIF -Morgan Stanley India Investment Fund
• IFN - India Fund, Inc
• INP - iPath MSCI India Index ETN

The 3-month charts below shows that while the Sensex & Nifty are up 5%, the INP (inspite of being denominated in dollars) is up almost 10% while the IIF & IFN are down more than 5%. The strength in the Indian rupee accounts for most of IIF & IFN’s underperformance. Wrt INP, I guess its recent launch has helped it garner a decent premium, for now at least.

The 6-month chart makes this more obvious - IIF & IFN were tracking the Sensex & Nifty up until December 2006, but since have diverged as the USD:INR rate moved from over 45 to below 44.

It’s also possible that IIF and/or IFN distributed dividends early this year, but I can’t find mention of it on Yahoo Finance.

Since December 2006, US investors have a new way to invest in India - the iPath MSCI India Index ETN (Ticker: INP). Per the iPath website, INP is:

“linked to the to the MSCI India Total Return Index. This index is a free float-adjusted market capitalization index designed to measure the market performance, including price performance and income from dividend payments, of Indian equity securities. It is currently comprised of the top 68 companies by market capitalization listed on the NSE“.

Readers may be aware of existing funds such as The India Fund (IFN) and the Morgan Stanley India Investment Fund (IIF). But Barclays chose to use Exchange Traded Notes for a greater degree of freedom in investing strategies & relatively less red-tape. INP has an annual fee of ~0.9% instead of a management expense ratio. Here are the sector weightings for INP:

The official INP site also provided a report on India, with a comparison of investment alternatives such as local securities, American Depository Receipts (ADRs), Open & Closed-end mutal funds, and structured products including the infamous Participatory Notes (PNs).

Bill recently wrote a post on his stock picks for India (specifically the Indian ADRs), and also referred to 2 reports published by Deepak Lalwani (pdfs here & here). The IT majors (Infosys, Wipro) and the Finance/Banking majors (ICICI, HDFC) continue to have the greatest mindshare amongst investors in the US.

Check out the comments to Bill’s post - several commenters have linked to interesting articles re: India, such as this one on homebuilder stocks such as Unitech.

Couple of interesting blog posts:

IndiaStockBlog plots the trailing 12 months P/E ratio for the major Indian ADRs:

Wonder what the forward P/E chart would look like?  

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Roger Nusbaum wonders how long the parabolic rise in the Indian indices will last:

“I think it is most important to view emerging market as an asset class. You have to have some exposure to be diversified. What you buy and how much you buy is more tactical than strategic. The strategy is own some, the tactic is the details. I buy into the whole theme but you don’t need me to tell you that India is very volatile and not right for everyone.”

Check out Trader Mike’s analysis of the India Fund (IFN) charts. He’s bullish but also cautions - “My one concern is the volume action. I like to see stocks making and/or approaching new highs on strong volume. If it does make a new high on low volume that could be a sign of a head-fake in the making.. “

IFN is managed by the Blackstone Group; per it’s fact sheet, the Fund employs both quantitative and fundamental analysis and has over $1.2B in net assets. Fundamental analysis relies heavily on direct discussions with management both in the U.S. as well as during frequent trips to India. In addition, having an on-the-ground research team in India allows a broader and deeper coverage of the market. Quantitative analysis involves the use of both asset allocation models and bottom-up stock screening models.

A look at the fund’s holdings (as of Dec ‘05) shows a heavy concentration of the Sensex/Nifty large-caps: 

Finance & IT are the favored sectors; while pharmaceuticals are noticeably absent from both top-10 lists:

Before investing, keep in mind that the fund is currently trading at ~30% premium over its net asset value (NAV), signaling that it’s quite popular among investors.