In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Should You Invest in the New India ETF?
03/04/2008 12:00 am EST
Vivian Lewis, editor of Global Investing, examines whether Wisdom Tree's new ETF covering the Indian market is a good investment.
The [recent] launch of the Wisdom Tree India Earnings Fund ETF (NYSEArca: EPI) gives me an opportunity to add to my position with a marginally different investment angle. But you cannot create a value fund for India (even if that is the Wisdom Tree approach) for various reasons:
1. India has an average P/E of 28x, second only to that of China in frothiness, and it has not changed despite the selloff in Bombay this year.
2. Indian accounting standards do not even include the notion of earnings, so the managers are substituting net income for it.
3. The payout ratio does not reward investors. Dividends are 0.84% on average, which is about as miserly as companies can get, in part because of the way the Indian tax system works.
4. India's 50% [annual] rise in stock prices over the past five years did not come from value stocks but from growth.
5. Foreign capital inflows have accounted for a lot of the boost in Bombay, but of course will be hampered if there is a global recession.
6. India [has] various restrictions on where foreign investment can go, limiting the amount going to supposedly sensitive sectors like retailing (!), as well as more normal sectors like media or aviation. India even requires at least 26% local participation in sectors like airport development, telecoms, [and] private banking. So the fund will have to buy ADRs and limit its exposure to sectors which might be attractive.
7. Even back-testing does not always show that the EPI approach produces better results than a straightforward purchase of the index, as with the MSCI India index. The value approach worked for one year, five years and ten years, but not mysteriously for 3 years, precisely when the Indian market boomed.
Despite the problems, this is a worthwhile investment now. The present breakdown of stocks based on analysis (which may not play out once the ETF starts to operate) would be Reliance Industries (13%); Oil & Natural Gas Co. (6.5%); Infosys (5.2%); Bharti Airtel (3.7%); ICICI (IBN, 3%); HDF (2.7%); STerlite (2.4%); Indian Oil Co. Ltd. (2.35%); SAIL (2.25%); and Tata Steel (2.8%).
By sectors EPI would have 25.37% in energy; 16.17% in materials; 13.34% in finance; 11.5% in [information technology]; 8.12% in industrials; 6.08% in utilities, 5.96% in consumer discretionary; 5.81% in telecom services; 4% in consumer staples, and 3.64% in health care.Subscribe to Global Investing here...
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