Why Indians Ignore The Stock Market While Foreigners Invest

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The equity market in India as represented by the benchmark Sensex is up 1.40% YTD. In the past year, the index has had a strong run going from over 16,000 to 20,443 this year before closing at 19,704 last Friday. The Sensex has more than doubled from the lows reached in early 2009 at the height of the global financial crisis as shown in the chart below:

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Sensex-5-Year-Return

Source: Yahoo Finance

Despite the solid performance the equity market, most Indians seem to avoid the stock market and instead invest in other assets. For example, the number of retail mutual fund accounts has declined by 4.25 million in the first 11 months of the fiscal year 2012-13 according to one report. This does not mean 4.25 million individual investors since one investor can hold multiple accounts.

Much of the rally in Indian stocks especially this year can be attributed to foreign investors who have pumped billions into the market while domestic investors have been mostly pulling their investments in stocks. Unlike other emerging countries such as Brazil where foreign investors have reduced their exposure in the past few years, India has become a hot destination for foreign investors.

From a story in the Journal earlier this month:

From January to March, foreign institutional investors’ ownership of India’s top 500 stocks rose at the fastest quarterly pace ever, according to Citigroup C -0.02% . Collectively, their stake of 21.1% hit an all-time high, and investors outside the country now own more of India Inc. than those within. Ultralow interest rates in the West helped push foreign inflows to $10 billion in the period, the second highest in any quarter.

Yet Mumbai’s stock market fell 3%. Even as foreigners were buying, the locals were selling: Domestic institutions like mutual funds sold off $6 billion. India’s low growth and high inflation have drained their enthusiasm for stocks.

It is interesting to analyze why foreign investors rushing into Indian equities while domestic investors are ignoring them.

Here are five reasons why domestic investors tend to avoid stocks:

1. Banks pay high interest rates for many types of accounts making them more attractive to high-risk assets such as stocks. For example, one can easily find banks offering 9.00% interest on a 1-year CD. Hence most people don’t bother with investing in stocks since they have not yielded astonishing annual returns since the financial crisis of 2009.

2. Traditionally Indians are highly conservative and this is reflected in the low stock market participation rate. India has one of the lowest stock market participation rate in the world at less than 3.50% according to one study. For a country with a population of over 1.2 billion this is indeed very low. Despite the tremendous growth of Indian equity markets in the past decade, the general population still considers equity investments to be highly risky.

3. Indians consider gold as “safe” investment compared to stocks. Hence India remains the largest importer of gold in the world.  The demand for gold rose from 679 tonnes in 2008 to 975 tonnes in 2011 despite higher gold prices before the crash in gold prices. Demand has picked up again as lower prices attract buyers. Though gold does not provide an income like stocks do with dividends, the demand for gold continues to be high since they are regarded as a store of wealth, used as jewelry , offered in weddings, etc.

4. The real estate sector is growing rapidly and prices seem to head for the stratosphere year after year. Unlike some other countries, real estate prices did not plummet due to the financial crisis and in fact continues to remain strong. As a result, more domestic investors are attracted to the real estate market than the equity market. In addition, most companies have low dividend payouts making their stocks unattractive to income investors whereas an investment in real estate can generate a better yield.

5. Saving for retirement by investing in stocks is not widely popular phenomenon. Most workers save for retirement in a fund known as Employee Provident Fund (EPF) that pays an interest of of 8.70% and is regulated by the state. Hence most of the retirement savings do not flow into the equity market. This is in sharp contrast to other countries such as the U.S. where most workers save for retirement by investing in stocks and bonds.

Related ETFs:

WisdomTree India Earnings (EPI)
iShares S&P India Nifty 50 Index (INDY)
PowerShares India (PIN)

Disclosure: No Positions

The Top Trade Partners of Germany 2012

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The German economy is the largest in Europe with a GDP size of about 2.6 Trillion Euros in 2012. As an export-driven economy, Germany consistently runs an export surplus.

The following chart shows Germany’s major trading partners in 2012:

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Germany-Trading-Partners-2012

Source: De Statis

Some interesting facts about Germany’s trade:

  1. Germany’s most important trade partners are other European countries. For example, the major source of imports last year was The Netherlands and the destination for exports was France. 
  2. About 69% of “Made in Germany” goods were exported to European countries.
  3. The 2nd most important market for German exports were Asia followed by the Americas.
  4. Asia accounted for only 18% of German imports.
  5. After France, the top destination for German exports was the U.S. and UK.
  6. In terms of imports, the country’s major import partners were The Netherlands followed by China and France.
  7. While the U.S. is a major export and import market for Germany, Canada does not appear in the top 10 trading partners list.

Related ETFs:

  • Market Vectors Germany Small-Cap ETF (GERJ)
  • iShares MSCI Germany Index Fund (EWG)
  • iShares MSCI Germany Small Cap Fund (EWGS)

Disclosure: No Positions

Should You Invest in Gold Stocks or Gold?

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One of the questions perennial confronting investors looking to invest in gold is whether to invest in physical gold or gold miners who actually produce the gold.

Generally investing is physical gold is better idea than buying gold stocks. Since buying and holding physical gold nowadays involves many problems such as the possibility of theft from one’s home, most investors choose an ETF that is backed up actual gold held in secure locations. The SPDR Gold Shares ETF (GLD) is one such ETF that is most preferred by investors. It is not a wise strategy to invest in gold mining stocks. This is due to many reasons including high volatility, low or no dividend payments, consistency in earnings, etc. Gold mining involves not just production but also exploration for discovery of new sources of the yellow metal. Exploration by definition involves high risk and many companies have collapsed in the past such as the infamous Bre-X of Canada. Mark Twain’s famous comment “A mine is a hole in the ground with a liar standing next to it” cannot be ignored before investing in gold miners. When gold prices rose year-after-year in the past few years before the recent downtrend, gold stocks did not keep up and in fact lagged the growth in gold prices. The following chart shows the difference in the long-term returns of the SPDR Gold Shares ETF (GLD) and Market Vectors Gold Miners ETF (GDX) which can be considered as proxy for gold mining stocks:

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GDX-vs-GLD

Source: Yahoo Finance

Here is another proof showing the performance of South African gold miners and gold price. South Africa is one of the largest producers of gold in the world. Hence the return of South African mining stocks against gold prices is highly relevant to investors.

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FTSE-JSE-Gold-Index-vs-Gold-Proce

Source: Angles and Perspectives, Q2, 2013,  the Quarterly Newsletter of PSG Asset Management

The blue line shows the performance of FTSE/JSE Gold Index which tracks the gold mining companies listed on the South African market.

From the report in the PSG Asset Management newsletter:

In mid-April the gold price fell 15% in three days.

At $1,322 the gold price was 31% below its high of $1,921 reached in September 2011. Some market commentators therefore believe gold now finds itself in a bear market.

The decline in the gold price resulted in a precipitous decline in the share prices of South African-listed gold stocks. At the time of writing, the FTSE/JSE Gold Index has endured a 37% year-to-date decline, following a 20% decline in 2012.

Gold shares have been a very poor investment for some time and the Gold Index is at the same level it was at in 2001.

What makes this lack of return all the more shocking is that over this period of more than 11 years the gold price has increased five times in dollars and more than four and a half times in rand terms. The FTSE/JSE All Share Index has tripled
over the same period.

Disclosure: No Positions

Update – 3/29/14:

Click to enlarge

Gold Mine Stocks vs Gold Price

Since 2004, gold mining stocks traded on South Africa’s JSE have consistently falled while gold price has for the most part gone up.

Source: Gold and platinum mines: ‘Eating sardines’ or ‘trading sardines’?, Allan Gray

Three Differences Between MSCI and FTSE Indices

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Index providers MSCI and FTSE have launched many indices over the years. Hundreds of ETF providers and other companies use these indices to benchmark the performance of their products. Some use the MSCI while others use the FTSE. For example, the iShares Emerging Markets ETF (EEM) tracks the performance of the MSCI Emerging Markets Index. The Vanguard FTSE Emerging Markets ETF (VWO), on the other hand, tracks the return of FTSE Emerging Transition Index.

Late last year, Vanguard decided to replace benchmark indices from MSCI with FTSE indices as for their ETF products. However iShares decided to stay with MSCI.

What are some of the differences between the MSCI and FTSE indices?

While there are many differences between the indices in terms of holdings, countries, sectors and style, in this article let me list three differences.

1. The MSCI EAFE Index (Europe, Australasia, Far East) and the FTSE Developed Ex North America Index have a greater than 10% difference in holdings.

2. The two index providers also differ in terms of country allocations in their emerging market indices. For example, MSCI considers South Korea as an emerging country and includes it in the emerging market index. But FTSE considers South Korea as a developed country and excludes it from the index.

3. MSCI excludes Pakistan and United Arab Emirates(UAE) from its emerging index since they are assigned the frontier market statuses. But FTSE includes them in its Emerging Index.

Update June 2017: MSCI added Pakistan to the MSCI Emerging Markets Index

The key takeaway from this post is that investors have to thoroughly review the benchmark index that an ETF tracks before deciding to investing in that ETF.

Source: MSCI versus FTSE: Why they’re not the same, Canadian Investment Review

Related:

Disclosure: No Positions

The Top 50 Global Pharma Companies 2013

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The Pharmaceutical Executive magazine published its annual ranking of the Top 50 Pharma Companies Worldwide based on sales earlier this month. New York -based Pfizer(PFE) was topped the list with a sales of over $47.4 billion in 2012.

The Top 50 Global Pharma Companies are listed in the tables below:

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1-Part-Top-50-Pharma-Companies-2013

2-Part-Top-50-Pharma-Companies-2013

Source: Pharmaceutical Executive

Here are a few observations:

  • Swiss drug giant Novartis(NVS) came in at number two with sales of over $45.0 billion.
  • Among the top 10, five are European pharma companies including Novartis, Sanofi (SNY), Roche (RHHBY), GlaxoSmithkline(GSK), and Astrazeneca (AZN).
  • Teva (TEVA) of Israel, the world’s largest generic maker had revenues of sales of over $17.0 billion and took the 11th spot. Teva’s growth so far has been astonishing and is now within striking distance of taking the 10th rank from Eli Lilly(LLY).
  • For the first time, Indian pharma maker Ranbaxy Laboratories appears in this top 50 list. Ranbaxy is majority-owned by Daiichi Sankyo of Japan.
  • For the first time in more than 50 years, year-on-year growth contracted in the U.S. market due to patent expiration of blockbusters such as Plavix, Seroquel, Lipitor, and Zyprexa and increased scrutiny of pricing by payers and regulatory approvals.
  • Due to the ongoing recession, growth in Europe was flat.
  • Fresenius is a leader in the dialysis market. Its Medical Care division trades on the NYSE under the ticker FMS.

Disclosure: No Positions

Also checkout: The Top 50 Global Pharma Companies 2014

Update:

Download: The Top 50 Global Pharma Companies 2012 (in pdf)