db x-trackers CNX Nifty UCITS ETF 1C (EUR) | DBX7 |
par
Gordon Rose, CIIA, CAIA29/04/2013
Stratégie d’investissement
The db x-trackers CNX Nifty UCITS ETF provides equity exposure to India. As with all single country emerging market exposures, this db x-trackers ETF would be best deployed as tactical tool within a well diversified portfolio. The ETF can also be deployed as a core holding complementing exposure to emerging markets in Asia and Latin America. Increased correlation with international stock markets over the past years makes the ETF less beneficial from a diversification point of view. The index correlated 74% with the MSCI World USD Index and 85% with the MSCI EM USD Index over the last five years; up from 67% and 89% respectively over the trailing ten year period. As the correlation with China remains relatively low, the ETF might be utilised as diversifier for equity exposure to China. The index correlated 44% with the MSCI China CNY Index over the last five years.
The ETF is suitable for investors believing in a story rooted in robust domestic demand streaming from the relatively young and increasingly affluent population in India. In addition, investors overweighting China can use the ETF to diversify their exposure within the emerging market equity segment of their portfolio.
Investors should keep in mind that the Indian equity market is still lacking transparency. The country does not permit free access to its market by controlling capital on the Rupee and on foreign investment. Indian companies have structural issues as many founders or India’s long-established business families hold controlling stakes in many companies; resulting in corporate governance issues. Especially the very complex ownership structure of companies with widespread pyramiding, cross-holding and the use of non-public trusts are far from transparent. In addition, accounting rules are yet to be up to international standards. Nevertheless, transparency has improved massively over the years.
Analyse fondamentale
In contrast to China and most developed markets, India has the benefit that its young, employable population is growing. However, the country still has a long way to go in modernizing its economy. Less than 10% of the working population is employed in a regulated job, leaving the remaining 90% without health and social insurance. With around 60% of its GDP coming from domestic sources, India is significantly more reliant on the development of its internal market than most emerging markets. In fact, domestic private consumption and investment are expected to remain the main drivers of GDP growth in the near future, although increased trade is expected to make a contribution at the margin as well. The country's large English-speaking workforce has made it a centre for the outsourcing of technology services; one of the more productive and export-oriented sectors of the economy.
India has long been one of the fastest growing economies in the world. However, recently the country’s GDP growth has slowed more than expected. During the final three months of 2012 the economy expanded 4.5% y/y, down from the 5.3% expansion recorded in the preceding quarter. Economists expect GDP growth of 4.8% for the fiscal year ending March 2013, slightly below from the government’s forecast of 5%.
Despite the economy’s slowdown, the Reserve Bank of India has hesitated to cut interest rates aggressively due to a high inflation environment. The central bank cut its repo rate by 1% between April 2012 and March 2013 while cutting the cash reserve ratio by 1.5%. In addition, the bank cut its key lending rate from 7.75% to 7.5% in March after a 0.25% cut in January, though warning that high inflation and a wide current-account deficit left little room for further rate cuts. RBI cuts have not, however, been fully passed on by commercial banks.. The government remains critical of this course of action, pushing the RBI towards a faster easing of monetary policy. At the same time, the central bank demands stricter fiscal responsibility by the government. Indeed, the country’s high fiscal deficit is reason for concern as it holds back banks to reduce their lending rate.
One of the key impediments to growth facing the Indian economy is rampant corruption, which can make it difficult for entrepreneurs to start new businesses or expand operations. Currently, almost half of the government’s spending for the current fiscal year is held up in slow-moving infrastructure projects due to red tape. The lack of a proper infrastructure is hindering the economy.
The IMF has repeatedly called on India to liberalise foreign investment and address controversial tax regulations in order to improve confidence amongst investors and boost capital inflows. In a good sign of openness, India’s government announced in 2012 that qualified foreign investors will now be able to own, in aggregate, up to 10% of an Indian company, with a 5% limit on ownership by any individual foreign investor. Previously, only institutional investors were permitted to invest directly in Indian equities. However, there is much more work to do to liberalise the Indian market as foreign investors are still not allowed to access specific sectors.
Construction de l’indice
The CNX Nifty Index provides exposure to Indian equities, representing the largest and most liquid stocks in the country. The index is market capitalisation weighted, including 50 of the 935 stocks listed on the National Stock Exchange of India Ltd (NSE). This represents approximately 60% of the overall market capitalisation of the country. The constituents are spread across over 20 sectors and thereby offer well-diversified access to the Indian stock market. To be considered, component stocks have to meet three criteria. The stocks have to be liquid, taking impact costs as a measurement; the constituents have to have a six-month average market capitalisation of at least Rs 5bn and at least 12% of its stocks must be available to investors. The index is calculated real-time during market hours and is reviewed quarterly with a 6 week notice given to markets before the changes will be made in the index. As of writing, financials (29% of the index’s value) is the biggest sector allocation, followed by IT (14%) and Energy (13%). The index is very top heavy, with the top ten holdings representing almost 60% of the index’s value.
Construction du fonds
This ETF uses swap-based replication methods to track the CNX NIFTY Index. To achieve this return, the fund invests in a fully-funded swap with its parent company Deutsche Bank. Under this swap agreement, the proceeds of fund holders’ investment in the ETF are transferred to the swap counterparty in exchange for the performance of the index. To mitigate counterparty risk, db X-trackers requests that Deutsche Bank post collateral in a segregated account with the custodian State Street Bank Luxembourg in Deutsche Bank’s name of and pledged in favour of the fund. Should Deutsche Bank default, the ETF may be terminated and assets of the ETF liquidated without giving prior notice to the bank. As of writing, the collateral comprises a large majority of OECD country equities and various other types of securities including government bonds. The company applies haircuts to the collateral’s market value (7.5%-20% for equities, 10% for corporate bonds, 0% for government bonds), which results in overcollateralisation of the fund. Collateral is reviewed daily by third party State Street Global Advisors (SSgA). At the time of writing, the collateral value is equivalent to 108.8% of the fund's NAV. The fund doesn't engage in securities lending, which limits counterparty risk at the fund’s level.
Frais
The fund levies a total expense ratio of 0.85%. This falls in the upper range of ETFs in line with other ETFs racking the Indian stock market. Other potential costs associated with holding this fund which are not included in the TER include swap costs, bid-ask spreads and brokerage fees.
Alternatives
In Europe, as of writing there are a few ETFs offering equity exposure to India. Most of the indices are tracking either the MSCI India Index or the CNX Nifty Index. The largest alternative in terms of total assets under management is the swap-based Lyxor ETF MSCI India. The MSCI India Index is a free-float-adjusted market capitalisation index, representing about 85% of the NSE. Therefore, the Lyxor ETF represents a slightly bigger share of the Indian economy. Investors interested in a more like-for-like alternative will find the iShares S&P CNX Nifty India Swap, tracking the same index as the ETF discussed here. The iShares ETF also uses synthetic replication and levies a TER of 0.85%.
In Hong Kong and Singapore, in addition to this ETF (03015, listed in Hong Kong; HE0, listed in Singapore), there is another ETFs tracking the CNX Nifty Index, namely the XIE Shares India (CNX Nifty) ETF (03091, listed in Hong Kong, TER 0.39%).
