PIN: Quality Indian Stocks Keep Winning

seekingalpha03-04

selamiozalp We covered the iShares MSCI India ETF (INDA) a while back as we figured that Indian equities would surge, given favorable risk premium alignment and trend growth numbers. Fortunately, our ...

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Fortunately, our ...</p>\n\n<a href=\"https://seekingalpha.com/article/4675599-pin-quality-indian-stocks-keep-winning\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FDN","symbol_name":"First Trust Dow Jones Internet I","start_time":0,"source_url":"https://seekingalpha.com/article/4675599-pin-quality-indian-stocks-keep-winning","article_id":"2416159063","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1488642770/image_1488642770.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2416159063","pubTimestamp":1709520496,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"selamiozalp We covered the iShares MSCI India ETF (INDA) a while back as we figured that Indian equities would surge, given favorable risk premium alignment and trend growth numbers. 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Fortunately, our rating worked out rather well, as the vehicle has surged ever since. INDA ETF Rating in August 2023 (Seeking Alpha) Although we think the revision of INDA ETF is justified, we believe a vantage point of a style-based vehicle of Indian stocks called Invesco India ETF (NYSEARCA:PIN) is warranted before we get back to assessing the broader Indian equity market as a whole. Unlike INDA ETF, PIN ETF is style factor focused in that it emphasizes high-quality companies with high-dividend yields. By doing so, the ETF hopes to deliver alpha on a risk-adjusted basis. Let's traverse into a discussion on a few of our latest findings pertaining to PIN ETF. Index Methodology The Invesco India ETF is a dual-factor vehicle. Its primary factor is quality, whereby it samples quantiles of stocks based on three sub-factor rankings, namely return-on-assets, asset turnover, and accruals. Factor 1 (LSEG) The second factor that comes into play is the high-yield factor. The methodology screens through Indian equities and partitions them into quantiles based on their trailing dividend yields; thereafter, the top 10% are selected for inclusion (if they also adhere to the quality factor's criteria). Based on our knowledge, quality, and high-dividend factors are both rewarded in the long term in the context of the U.S. markets, but we are not sure about Indian equities. However, 10-year panel data shows that PIN ETF outperformed INDA ETF. Thus, we think it's safe to assume these are long-term reward factors in India. Aside: Rewarded means there is long-term evidence that the factor provides meaningful returns and that it's not merely a short-term phenomenon. Data by YCharts Macro Variables To Support Index Growth I collated a few macroeconomic variables to set the tone; they're visible in the diagram below, with a discussion succeeding. Created by Author (Sources: IMF, CEIC, and Trading Economics) India's debt-to-GDP is low for an emerging market country. As a rule of thumb, debt-to-GDP below 70% is considered safe. As such, we believe India has the ability to leverage additional debt to spur growth via investment in its infrastructure and technology, subsequently lending the equity market an opportunity for additional growth. Furthermore, India's nominal GDP is forecasted to grow by 6.5% this year, which is above the lower bounds of acceptable to emerging market investors (4%). In fact, India's GDP is forecasted to outpace other BRICS nations until 2028, providing a reason to shift allocation to India from other EM nations. Other reasons to be positive about India are its current account deficit-to-GDP of 2% and low external debt-to-GDP of 18.9%. The prior might seem like an odd statement, but the reasoning here is that many exporting nations are in a current account deficit due to diminishing commodity prices, and a deficit below 4% is acceptable for an EM. We think the current account will revert to mean once we hit a global reflationary period. Lastly, a noteworthy matter is India's easing of capital flows. According to the International Monetary Fund's eLibrary, capital flow restrictions have gradually eased since the early 2000s, with exceptions to protected industries. Continuous global integration often leads to higher equity returns due to a more conducive risk-taking environment and broader access to capital. As such, we think it's a factor that could drive equity returns in the coming years. Why does all this matter to PIN ETF's investors? The aforementioned factors matter because the Invesco India ETF's emphasis on profitability is directly linked to the ability of India's systematic ability to generate profits or/and allow capital mobility. Moreover, high-dividend yields follow suit as they savor the after-effects of profitability. As such, we believe India's positive outlook will complement PIN ETF's future performance. Holdings Let's take a look at some of PIN ETF's holdings. Seeking Alpha At first glance, it's recognizable that the ETF is overweight cyclical assets, with financials, technology, consumer cyclical, industrials, and basic materials making up more than half of its portfolio. Although we anticipate cyclical assets to fall under pressure later this year, PIN ETF's style concentration must be considered. As a reminder, this ETF is focused on high-quality stocks, which is a category that generally survives economic downturns and performs in line during economic expansion. Therefore, we are not concerned by this ETF's cyclical exposure, as its best-in-class picks phase out much of that risk. Furthermore, we spotted a few names in the ETF that we like. For example, PIN ETF's exposure to Tata Motors Ltd is encouraging to see as the company has a significant stronghold over the domestic automotive market with a 39% market share, which allows secular sales. In addition, we like PIN ETF's exposure to HDFC Bank Limited (HDB) because of the exponential growth in emerging market credit, providing sustainable growth opportunities. Other names in the ETF simply make sense to us. However, without further emphasis on the names, we would prefer to focus on the systematic risk as PIN ETF possesses a diversified portfolio. As per its portfolio, PIN ETF's return on equity is significant. In fact, it is higher than the 18.22% ROE achieved by the S&P 500 in Q4. In addition, PIN ETF's price-to-earnings ratio of 25.4x is lower than INDA ETF's 30.77x, while its forward P/E of 21.92x is even lower. Therefore, relative value is likely to store. Portfolio Characteristics (Invesco) Risk Appraisal A risk appraisal of PIN ETF shows it has a Sharpe ratio of 0.27. I wouldn't say its Sharpe Ratio is spectacular, but it's certainly respectable, considering its beta coefficient of 0.77 is lower than your general index fund. Risk Metrics (Morningstar) What we do like about the PIN ETF is its capture ratios and maximum drawdown. As expected, its upside capture (how much it captures versus a broad-based market upturn) is below average due to its low beta. However, its maximum drawdown and downside capture are both superior, implying positive skewness is highly probable (meaning it is probably not sensitive to tail risk). Capture (Morningstar) Dividends The Invesco India ETF's dividend yield of 1.98% isn't alluring at first sight. However, look at the growth rates. This ETF is proliferating at a 3-year compound annual growth rate of 47.25%. Although such progress isn't guaranteed to be sustained, it shows the ability of this ETF to produce significant future dividend yields. Seeking Alpha With its dividends covered, we urge foreign investors to seek additional advice regarding the taxation of PIN ETF's dividends, as the ETF hosts foreign enterprises that may be subject to double taxation or withholding taxes. Potential Downside Risks A primary risk consideration pertaining to the Invesco India ETF is the retrospective approach of its factor exposure. What do I mean by that? I'm emphasizing that it ranks its constituents' fundamental performance on a retrospective basis. In doing so, PIN ETF neglects economic or market regime changes that could deter the value drivers behind its constituents' profitability and dividends. Furthermore, geopolitical risk in India is a noteworthy factor. Its general election kicked off on February 27th, and investing in the middle or right after an election is risky, especially in an emerging market election. Lastly, a risk appraisal shows that PIN ETF's Sharpe, Sortini, and Treynor ratios are worse off than the INDA ETF, SPDR S&P 500 ETF Trust (SPY), and the iShares MSCI World ETF (URTH). As such, there is a possibility that this ETF may present worse risk-adjusted returns if retrospective quantitative metrics are anything to go by. KINDLY CLICK ON IMAGE TO ENLARGE (Portfolio Visualizer) Final Word  The Invesco India ETF is aligned to benefit long-term investors as its high-quality, high-dividend methodology aligns with a secular growth trajectory. Although the ETF possesses certain quantitative risks, we are bullish about its total return prospects given its methodology, India's macroeconomic variables, and the ETF's stock selection.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2416159063"}