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Regional ETF Focus Get set for a liquidity rally India (Underweight) (Joanne Goh, joannegohsc@dbs.com) Near term outlook We are less negative on India compared to the last quarter. Growth seems to be losing steam but we believe it is normalizing after the scorching pace in the previous quarter, notwithstanding the higher inflation and rates hikes that could also possibly dampen demand. The reform agenda supports a longer-term positive outlook. It is also enough to support the 8% GDP growth target as well as alleviating the high budget deficit and inflation concerns in the near term. While strong nominal GDP growth could be positive for earnings growth in India, we are cognizant of higher operating costs eating into profits especially after recent fuel and wage hikes. Inflation at its extreme may also snap consumer demand and hurt top line growth, in our view. Valuation in India is expensive and earnings expectations barely changed throughout the year. We suspect Sensex will continue to rise and thus valuations as well as risk for the market. We maintain Underweight on India on valuation grounds. Drivers: • The economy is primarily driven by domestic consumption. Long term infrastructure development and the need to improve living conditions (reduce slum areas, improve education and reduce poverty) imply long-term potential growth of 7.5%. The growth rate may be understated considering the huge population and the government's recent reform efforts. • Post re-election of the ruling UPA government last year, the government is expected to step up its reform efforts and better quality growth can be achieved. • We believe growth can surprise on the upside following the 2010/11 budget, which is thought to be wellbalanced. Government forecasts 9% growth this year and double-digit growth rates in the coming years. • Relaxation in FDI rules and capital flows should encourage more investor flows into India. Stock market reforms like privatization and increase in foreign ownership will improve market efficiency. • A strong domestic savers' pool contributes to the longterm growth potential of the market. Risks: • India valuations trade towards the higher end of the range and do not provide enough cushion should risk aversion persists. The market is more volatile than most Asian markets. • Supply constraints as a result of under-investment will continue to challenge the inflation outlook in our view. Fig. 18: Singapore and Hong Kong listed ETFs exposed to the India market ETF Ticker Mkt Cap Style Country/ Underlying Bid NAV/ Premium/ Avg Daily Avg Daily (US$ m) Region Index Price INAV Discount Volume Value (US$m) Tracker 15-Oct (latest) (20 day) (20 day) Singapore listed ETFs IS MSCI INDIA INDIA SP Equity 1038 Country Fund India MXIN 8.37 8.35 0.1% 554,305 4.503 Lyxor MS India INR SP Equity 303 Country Fund India MXIN 18.63 18.51 0.6% 863 0.016 DBXT MSCI India LG8 SP Equity 4 Country Fund India NDEUSIA 11.68 11.77 -1.0% 17,386 0.198 DBXT Nifty XNIF SP Equity 534 Country Fund India NIFTY 141.67 141.43 -0.1% 4,508 0.627 Lyxor India Nifty S$ LNFU SP Equity 46 Country Fund India NIFTY 18.30 18.01 0.9% 1,813 0.022 Hong Kong listed ETFs iShares Sensex Tracker 2836 HK Equity 289.9 Country Fund India SENSEX 20.30 20.25 0.6% 1,234 3.126 Lyxor MSCI India 2810 HK Equity 301.0 Country Fund India MXIN 144.70 143.54 1.0% 6 0.106 DBXT S&P CNX Nifty 3015 HK Equity 534.7 Country Fund India NIFTY 1095.00 1097.47 0.0% 0 0.068 Source: Bloomberg. Notes: HK-listed ETFs - Vol in ‘000s, Price and NAV are in HKD unless otherwise stated. SG-listed ETFs – Actual vol traded, Price and NAV are in US$ unless otherwise indicated. Page 24
Regional ETF Focus Get set for a liquidity rally India : Overheating or slowing (Ramya Suryanarayanan, ramya@dbs.com, extracted from same name report) • The sharp slowdown in June industrial production growth (in YoY terms) has led to worries about an imminent slowdown. Only a few months ago, the sharp rise in the same rate led to worries about overheating • The economy neither went through a phase of overheating nor slowing, rather a temporary surge in demand (owing to pent-up factors such as recovery from the post-Lehman shock) and is now seeing a phase of normalization that may well include an “undershoot” • We continue to forecast 8.8% growth in FY10/11, slightly above-consensus. We also expect the central bank to continue with rate hikes until at least Mar11. We forecast another 75bps of rate hikes in the repo rate and another 100bps of hike in the reverse repo rate by Mar11 • There has been some progress on the reform front, notably on oil pricing and a reduction in government stakes in public sector companies. We expect progress on tax reform, land reform and further liberalization of FDI to support investment and growth Summary If worries about the evolution of the European debt crisis was the dominant concern in the markets in the Apr-Jun quarter, presently, worries about a double-dip recession in US and China are the risk factors keeping markets edgy. Our take in the Apr-Jun quarter was that a slower Europe (assuming no full-blown financial crisis) by itself would not derail global growth since Europe follows global growth, not leads it. Given our view on the importance of China to global and Asian growth, the prevailing uncertainties are more serious. However, we also believe final consumption (and investment) demand growth in China remains resilient and will continue to support growth in China. In fact, we think growth in the second half of 2010 in China would be better than 2Q. US consumer demand, while weaker than thought earlier, (following significant backward revisions to the past year’s data) is expected to grind higher at a two percentage annual pace. As such, we think current mixed global data trends are only a reflection of normalization in demand and / or temporary weakness in the supply response. Even as uncertainties hounded the global recovery, we upgraded our FY10/11 (Apr-Mar) GDP forecast for India in late July to 8.8% from 8.3%. Available data so far, including GDP for Apr-June quarter which grew by 8.8% (YoY) support our view. While data out of India has also been more mixed of late, we do not perceive anything more than a much necessary normalization in the economy (Chart 1 & 2). Chart 1: GDP contribution by sector % YoY 11 8 5 2 -1 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Services Construction GDP Latest: Apr-Jun10 Industry Agri Chart 2: GDP by expenditure – breakdown unreliable % QoQ saar, 2qma 15 10 5 0 -5 -10 Mar-07 Mar-08 Mar-09 Mar-10 Consumption Errors Neither overheating nor slipping back Errors too large Investment GDP Is the Indian economy overheating This was the worry in Apr-May as industrial production growth registered 14% (YoY) and inflation galloped to double digits. Now with production growth halving to 7% (YoY) in June, the worry is Page 25
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