20 Portfolio Adviser November 2017 www.portfolio-adviser.com

Equity boom alters India’s investment landscape

Letter from… India

01 NEWS ROUND-UP

Ross Hallam, Head of trading, RBC Global Asset Management

Akey theme of trading Indian equities over the past three years has been the emer-

gence of domestic funds. Indian equity mutual fund assets un-der management (AUM) grew by more than 50% in the finan-cial year 2016-17 and there have been inflows into mutual funds each month since the general election in 2014.

In July 2017 alone, inflows to-talled $2.6bn (£1.97bn). This has altered the landscape of the In-dian market, meaning large do-mestic mutual funds are a great source of liquidity for the foreign investors who make up the ma-jority of equity trading in India.

Equity influxHistorically, retail penetration in India was very low with less than 3% of the population in-vesting in equities. In late 2016, however, the government’s ‘demonetisation’ programme boosted investment in the eq-uity market following an influx of money into the formal bank-ing system. The beneficiaries have been Indian banks that run large mutual fund businesses, such as Icici and HDFC.

Having visited Mumbai re-cently to meet brokers, the ex-changes and the regulator, our experiences have led us to alter our approach to trading in India.

The huge monthly inflows into a relatively illiquid market means domestic funds run gen-erally high cash levels, there-fore they are likely to be net buy-ers of the market. This can lead

to market support in times of weakness as cash is used to par-ticipate in market strength.

With Indian local mutu-al fund AUM growing to more than $90bn, trading desks have become far more profession-al. Traditionally, local trad-ers have had a poor reputation among the international trading desks of large global asset man-agers, but recently we have ob-served a marked improvement in behaviour and a willingness to trade large blocks of stock at market levels.

Similarly, local brokers have now grown in stature, providing excellent links to both the local funds and high net-worth indi-viduals in a way that global bro-kers cannot.

We visited the three largest local brokers and noticed their scale and resources were unri-valled. We have increased our use of these brokers, particu-larly when we are looking to sell stock, as we believe they have an excellent opportunity of placing a block into a cash-rich local mu-tual fund.

Stay vigilantLocal brokers, as well as ex-changes and custodians, have had a reputation for leaking information into the market. While this has improved, some local mutual funds seem to exist where the front-running of large orders from global asset manag-ers occurs.

We therefore need to remain vigilant, especially when we are looking to enter a new position

in India. We know the local mu-tual funds are likely to be trad-ing in the same direction as us due to their high cash levels.

In some cases it may be pru-dent for us to concentrate our efforts to find liquidity through larger global brokers in order to minimise information leaks.

We are happy to be as aggres-sive as we can on the first day of a large multi-day order to ensure we build the biggest position possible before potential infor-mation leakage after market.

Back to futuresDomestic brokers tend to have larger futures desks than their

global peers. The Indian futures market is five times the size of the cash market and this pro-vides an excellent avenue of li-quidity for us in those compa-nies with futures listings. As the number of companies with futures listings grows, this will add liquidity to the cash market as the arbitrage desks play the spreads between the two.

As our AUM grows and our position sizes become larger, block liquidity is even more im-portant. One global broker now has a trader dedicated to this, despite the fact the official win-dow to cross blocks is just the first 20 minutes of the day.

Domestic mutual funds are a good source of liquidity for the foreign investors who make up the majority of equity trading in India

www.portfolio-adviser.com November 2017 Portfolio Adviser 21

Our suggestion to the regu-lator, SEBI, that this block win-dow is increased, has been well received. This should help erad-icate slippage risks that occur when executing blocks outside of the allocated window.

Developments in Indian mar-ket structure have been positive as the country’s capital markets reduce their reliance on foreign capital. There are improvements still to be made, however, and the introduction of an auction facility at the close would pro-vide extra block-like liquidity.

This is something we will rec-ommend to the regulator and exchanges in the future. LW

AT A GLANCE : INDIA

DRIVING UP EXPORTS Source: worldstopexports.com

US TOP EXPORTS Source: worldstopexports.com

TOTAL POPULATION Source: worldometers.info POPULATION FACTS Source: worldometers.info

BLING BLING Indiatoday.in

CUT FROM THE RIGHT CLOTH Indiatoday.in

Popu

lation

(m)

Vehicles was the fastest-growing among the top 10 export categories, up 162.2% for the seven-year period from 2009.

The only declining category among the countryʼs top 10 exports between 2009 and 2016 was electronics which fell 14.6% in value over the period.

1$43BN

16.5%OF TOTALEXPORTS

GEMS,PRECIOUS METALS

2$27.7BN

10.6%OF TOTALEXPORTS

MINERAL FUELS INC. OIL

3

4

5

6

$16.5BN3.4%

OF TOTALEXPORTS

BEVERAGES, SPIRITS,VINEGAR

7

8$8.2BN

3.1%OF TOTALEXPORTS

ELECTRICALMACHINERY,EQUIPMENT$15BN

5.7%OF TOTALEXPORTS

VEHICLES

9$7.9BN

3%OF TOTALEXPORTS

KNIT OR CROCHETCLOTHING,ACCESSORIES

10$6.4BN

2.5%OF TOTALEXPORTS

IRON, STEEL

$11.3BN4.3%

OF TOTALEXPORTS

ORGANICCHEMICALS

$13BN5%

OF TOTALEXPORTS

PHARMACEUTICALS

$13.6BN5.2%

OF TOTALEXPORTS

MACHINERY INC.COMPUTERS

$9BN3.5%

OF TOTALEXPORTS

CLOTHING,ACCESSORIES(EXC. KNIT & CROCHET)

Indiaʼs populationis equivalent to

17.74%of the worldʼs total

India consumes about

20%of the global

gold production…

75%of which goes intomaking jewellery…

30%of which is

exported to the US

32.8%of the population

is urban

0

300

600

900

1,200

1,500

MEXICO

RUSSIA

BANGLADESHNIGERIA

PAKISTANBRAZIL

INDONESIAUSINDIA

CHINA

1.4b

n

1.3b

n

325m

265m

265m

210m

198m

192m

144m

130m

The median age in India is

27 years

+162.2%

-14.6%India tops the world when it comes

to producing jute and holds

63%of the global market sharein textiles and garments.

Domestic mutual funds are a good source of liquidity for the foreign investors who make up the majority of equity trading in India