Thursday, November 23, 2006

Indian Equities

We came across a presentation on the Indian equities and the tax laws in India. This presentation makes a bull case for Indian equities in the next five years because of the following reasons.

  • The Indian economy is growing at a fast pace and it is unlikely to slow down in the next several years
  • Indian tax laws favor the investor - there are no taxes on long term capital gains or dividends. Short term capital gains are taxed at 10%
  • Indian population is not exposed to equities - this should correct itself in the next several years
  • The fundamentals of top two hundred Indian companies is getting better. The ROE of the companies is at 22% and ROA is at 15%.
  • The slide deck also talks about the likely scenario for Indian stocks to be in the 19,000 - 23,000 range by 2010. This comes to a growth in the range of 9 % per year for the next four years.

As we have done in our previous articles, we will focus on the investment vehicles available to US residents to invest in India.

The Indian stock market - BSE Sensex has gained 45.5% thus far this year and the index is seemingly moving upwards. This comes on the heals of a 42% gain in equities in 2005. The returns are quite extra ordinary and one can be certain that this kind of returns can't be maintained to perpetuity. The returns have to go down sooner or later - the longer this lasts, the more severe will be the correction.

Let us look at the different instruments one can use to invest in India and see which ones are attractive at the moment.

EEM is the iShares emerging market fund and has returned about 17.39% YTD. If one bought the ETF at the low 80's in the second quarter, the ETF has returned more than 30%. EEM has an expense ratio of 0.77%. EEM had 5.8% exposure to India at the end of October.

VWO is the Vanguard emerging market fund and has returned about 15.88% YTD. This correlates highly with EEM but has a lower expense ratio of 0.3%. VWO has a 7.07% exposure to India.

IIF is Morgan Stanley India Investment Fund, Inc. is a non-diversified, closed-end management investment company. The Fund's investment objective is long-term capital appreciations, which it seeks to achieve by investing primarily in equity securities of Indian issuers. The Fund will invest at least 65% of its total assets in equity securities of Indian issuers; which for this purpose means common and preferred stock bonds, notes and debentures convertible into common or preferred stock, stock purchase warrants and rights, equity interests in trusts and partnerships and American , Global and other types of Depositary Receipts. The Fund may invest up to 25% of its total assets in unlisted equity securities of Indian issuers.Currently IIF sells for about 2.48% premium to the net asset value. The management fees for this stock is 1.27%. The total return of IIF is 42% compared to the BSE Sensex Index return of 45%. Interestingly enough, the fund is trading at a slight premium of ~1% to its NAV.

IFN India Fund is a closed-end management investment company. The fund seeks long-term capital appreciation through primarily investing in the equity securities of Indian companies. The fund will invest at least 80% of its total assets in the equity securities of Indian Companies. The management fees for this stock is 1.47%. The fund has returned 25% compared to the BSE Sensex index of 45%. To top it off, the fund is selling at 10% premium to its NAV.

MINDX Mathews India Fund is a relative new comer to the block. The fund carries an expense ratio of 2.75% has returned 25% YTD. This compares to the BSE Sensex index gain of 45%.

ETGIX It has an initiation fee of 5.75% for small sums of money that declines to zero if the capital is greater than a million dollars. This is not targeted for individual investors but is targeted more towards institutional investors that want an exposure to India. The fund also has an expense ratio of 2.75% on top of the initiation fee. This fund has returned 33% YTD.

EEB ( Claymore/BNY BRIC ETF ) - This is a new ETF targeting only the BRIC countries - Brazil, Russia, India and China. The fund doesnt have the assets divided equally with all the four countries but it only specializes in these four emerging markets. The fund carries an expense ratio of 0.65% and returned 8.7% since inception.Although both India and China look expensive at the moment compared to other markets, the growth in these markets make it look as though there is still upside for companies in these countries.

To summarize, EEM/VWO provide partial exposure to India with lower expense ratios. Among the pure plays, IIF is the best by far followed by MINDX. EEB is a newcomer and not enough information is available regarding per country investment break down.


Anonymous said...

Given this analysis, would it be better to buy funds or own stocks of the best Indian companies?

changpeng05 said...

It is difficult to beat the index and the india funds are proving that. Even if you buy all the stocks available in US, it wont give you the diversification.

If you can buy the top 200 stocks in BSE Sensex - that would be adequate diversification.

However, I would buy when the market dips and now the market is over itself in an euphoria.


Anonymous said...

Well the best way the invest right now might be to selectively invest in IPO's. Though risky, if invested wisely, IPO's can generate high returns quickly. Secondary market purchases are high risk investments right now not only in India but globally.