Big Shifts in India’s Growth Leaders Sector AllocationsCarlos Diez, MarketGraderMay 27, 2021
India has been quietly making the case for being the best performing large emerging market globally in the last year, despite the pandemic still raging on in the country. Its strong performance has coincided, through April 30, with the one-year anniversary of the MarketGrader India-All Cap Growth Leaders Index (MGINGROW, or the “Index”) as the benchmark for the VanEck Vectors India Growth Leaders ETF (GLIN). The Index has fully participated in the market’s rise, earning 56.5% between April 30, 2020 and April 30, 2021 compared to 51.4% for the MSCI India Index (MXIN Index USD).1
MGINGROW consists of the 80 most fundamentally sound companies with the best prospects in India—based on MarketGrader’s proprietary score—whose shares are listed in the country’s national exchanges or in the U.S. Constituents are selected based on MarketGrader’s methodology, which gives higher scores to companies with strong growth characteristics, sound fundamental indicators of quality, and reasonable prices.
India: Large, Small or GARP?
Tracking Indian equities has been anything but straightforward in the past, with investors often choosing to give up returns by shunning the country’s small caps, in exchange for the lower volatility offered by the country’s large caps. GLIN now gives investors a third option by focusing on company selection, regardless of size, while potentially delivering better risk-adjusted returns in the long run.
Indian small caps have beaten large caps easily in the last year, with the MSCI India Small Cap Index up 91.5% through April 30 compared to a 51.4% return for MSCI India, a large cap benchmark. Volatility for both indexes was almost identical, at 21.3% for the small caps index and 21.4% for the large cap index2. The return for MGINGROW was closer to that of the large cap index, with MGINGROW up 56.5% in the last year. It did so, though, with lower volatility than both the large and small cap MSCI indices, based on its 17.5% standard deviation.
(MXIN Index USD)
MSCI India Small Cap
(MXINSC Index USD)
All Cap Growth Leaders
(MGINGRTR Index USD)
One-Year Ending April 2021 Return 51.4% 91.5% 56.5% Volatility 21.4% 21.3% 17.5% Return / Volatility 2.4 4.3 3.2
Returns measured from 4/30/2020 through 4/30/2021. All returns are in USD. Sources: Bloomberg & MarketGrader.
Where to Now?
The most interesting observation to us following the recent March 2021 Index rebalance is how different the sector makeup looks from its historical sector breakdown, suggesting that the pandemic has created significant dislocations across all industries in the country. This may continue for some time as the country now battles its fiercest COVID-19 surge to date.
The Materials sector, which as of April 30, 2021 accounted for 23% of the index (up from 7% before the rebalance) is comprised of various Chemicals sub-industries. Asian Paints (5.27% of GLIN holdings as of 5/24/2021) and UltraTech Cement (4.44%) were both added to the index at a ~5% weight. An outsized exposure to the sector might help the Index withstand the rising inflationary pressures that have crept into global markets lately, or at least participate in some of the upside of any global inflation trade.
Categories Asian Paints UltraTech Cement Growth (B+) - Solid growth indicators from top to bottom. (B) - Acceptable indicators. Value (C) - The stock looks rich at the current valuation. (B) - The stock looks fairly priced, offering some margin for error if fundamentals deteriorate. Profitability (A-) - Generally solid indicators. (B-) - Average profitability indicators. Cash Flow (A) - Cash flow indicators are outstanding, giving the company ample options to fund future growth or return capital to shareholders. (B+) - Healthy cash flows.
Another stand out is Healthcare, sitting at 28% of the Index as of April 30, 2021 (up from 22% before the rebalance). Following the collapse of India’s health care system under the wave of COVID and the social unrest this has spawned, we wouldn’t be surprised to see this sector become a major beneficiary of long-term government spending, which could mean an elevated allocation to the sector for years to come.
1 Source: Bloomberg and MarketGrader. Past performance is not a guarantee of future results. Index returns are not reflective of fund’s returns. It is not possible to invest directly in an index.
2 Volatility based on annualized standard deviation. Source: MarketGrader.
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Authored byCarlos Diez
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