Significant Exposure to Cyclical Sectors
In a previous blog post, we discussed the industries that are poised to benefit from the Indian budget rollout. The key themes of the budget were centered around (1) ramping up local investment efforts, (2) encouraging foreign direct investments (FDI), (3) the fast-tracking of projects, (4) reining in India’s government deficit, and lastly (5) overhauling India’s complicated tax system. We believe the key industries that stand to benefit from these reforms are the Financials, Industrials and Energy sectors. It is thus unsurprising that cyclical sectors have led defensive sectors in the recent rally. It is worth noting that the cyclical sectors have averaged a return of 55.7% between the 2013 and the 2014 Index screening dates, while the defensives have returned only 27.8% during that period.12 As of August 31, 2014, WTIND had nearly 85% exposure to cyclical sectors.
The 2014 Annual Rebalance
The most important single part of WTIND’s methodology is its annual rebalancing process, which occurs with a screening date of August 31 of each year. This is where the approach seeks out India’s profitable companies and then weights them according to their profits. The aggregate result tends to:
• Trim weight from companies that have appreciated in price but whose earnings growth has not kept pace. Companies whose earnings have gone negative are deleted.
• Add weight to companies that have seen earnings growth but whose share prices have not responded correspondingly. Companies whose earnings have become positive are added.
After a year of WTIND’s strong outperformance of MSCI EM, we think the importance of such a disciplined, rules-based process only increases. In future blog posts, we will explore how WTIND will be positioned after the 2014 rebalance, as well as for the potential for this process to mitigate the risk of exposure to overvalued stocks in India.
1Refers to the MSCI Emerging Markets Index; performance measured from 12/31/12 to 12/31/13.
2Refers to MSCI ACWI Index; performance measured from 12/31/12 to 12/31/13.
32014 performance is measured through 8/31/14.
4Andrew MacAskill & Unni Krishnan, “Modi-Led Bloc Wins Biggest Election Mandate in Three Decades,” Bloomberg, 5/17/14.
5“India Budget: Arun Jaitley Unveils Reform Plans,” BBC News, 7/10/14.
6Refers to WTIND’s positive returns between 12/31/13 and 5/16/14, and then again between 5/16/2014 and 8/31/14.
7Source: Bloomberg.
8Sources: Reserve Bank of India, Bloomberg as of 8/31/14.
9Source: Bloomberg; refers to the rupee-to-U.S. dollar exchange rate of 68.8 on 8/28/13.
10Source: Bloomberg as of 8/31/14.
11Sources: WisdomTree, Standard & Poor’s, with WTIND’s constituents measured from 12/3/07 inception to 8/31/14.
12Source: Bloomberg, with performance measured from 8/31/13 to 8/31/14.
Important Risks Related to this Article
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse
governmental regulation and intervention or political developments. Investments focused in India are increasing the impact of events and developments associated with the region, which can adversely affect performance.