By Sourajit Aiyer
Sourajit Aiyer is a researcher for South Asia Fast Track
Over half of Indias large companies delivered a Return on Equity(RoE) of more than 10 percent in each of the five years up to 2016. It delivered the best results out of a sample of 27 emerging/frontier markets and five developed markets (including Israel). An equal number of large companies also delivered a positive CAGR in profits over this five-year period making India one of the only eight countries out of the 32 to do so. Finally, over 90 percent of Indias large companies were profitable in 2016again one of the only eight countries out of the 32 to be so. Large companies here refer to the Top-200 listed companies by 2016 market cap. They have better access to resources and hence, form better proxies as market performers.
This data highlights the breadth, consistency and buoyancy of the relative market performance in India, compelling foreign investors to take a deeper interest in the economy. However, many investors in Israel would have been unaware of this, since the investor interest in its domestic real estate, VC-funded start-ups and the US markets, far overshadow any potential interest in foreign securities. Having said that, other countries have taken notice of the India market. While Singapore houses many portfolio asset managers who run India funds, the Singapore exchange co-listed an index future of the Indian benchmark (Nifty 50) on their exchange. The traded volumes of this SGX Nifty recently hit as high as 52% of the Nifty future volumes across all exchanges. The journey of the last several years to reach this 52% has been extremely lucrative for Singapore.
The attractive Indian securities
Apart from performance, there are other reasons making Indian securities worth consideration. In sector-concentration, the contribution of the three largest sectors to the profit-pool of its Top-200 companies was 56% in 2016. Most peers had a higher concentration which possibly indicates the impact on profit-composition of their focus on only a few sectors of competitive advantage. If a structural or cyclical risk were to hit these large sectors, India would fare relatively better. Israels concentration was 69 percent, which increased from 40 percent in the last 5-years due to traction in energy and real estate scrips. However, Indias concentration held at 56 percent with other sectors also showing a healthy growth in profits.
The second reason is the high level of productivity of the India markets. If one breaks down the RoE with DuPont method, India was one of the 11 markets that notched a high asset turnover ratio in 2016, higher even than Israel. Lastly, the average size of Indian companies is by no means, small. If one looks at the profit-per-company of the largest 200 companies, then India ranks just after the developed markets and emerging markets like China, Korea and Russia. India is also going through policy reforms, thus expanding its organised market and the addressable consumer base, making it six times larger a market than Israel. The volume-driven growth that India offers is unparalleled elsewhere, except China. Companies participating in this formalisation of the economy are set to ride a growth-curve, as would their investors. All these factors can nudge more foreign investors, potentially from Israel, to consider investing in Indian securities. As it is, foreign investors already hold around 25 percent of Indias market cap; amongst the highest in the emerging market universe.
How will Israel benefit from India?
Both nations have entered several partnerships recently, but those are mostly in security and technology areas. However, given the volumes in Tel Aviv stock exchange; which are relatively less than its developed market peers, sectors like investments also should also be considered between the countries. Most of the investors are interested in listing their hi-tech firms and start-ups on the US exchanges like Nasdaq, apart from staying private with PE/VC funds. Due to this, Israels total volume/market cap ratio was less than ~40 percent, while it is close to, or more than, 100 percent in USA, Germany and Canada. It was even lower than developing market exchanges like India, China, Thailand, Korea, South Africa, Brazil and Turkey, using WFE and Bloomberg data.
According to the IMF and Bloomberg data, Israels market cap/GDP ratio (of Top-200 companies)was at ~50 percent, making it lower than its developed market peers, and even developing markets like India, Thailand, Philippines, Morocco, Chile, South Africa, Korea, and Saudi Arabia. New listings often help evince fresh investor interest in the stock markets, but if Israeli companies are hesitant to list in large numbers due to other priorities, co-listing of Indian securities might help generate fresh interest. Apart from the SGX, foreign securities have proved lucrative for many global exchanges. As per WFE, they made up ~12 percent of Nasdaqs cash volumes in 2016, ~7 percent in Johannesburg, ~6 percent in NYSE and ~13 percent in Oslo. If Israels domestic real estate prices eventually peak or the hit-rate of its listed start-ups dips, then foreign stocks like co-listed Indian securities may be an opportune avenue for Israeli investors to consider, for earning decent yields.
The opportunities for both the economies
Israel has a small population and high per-capita income. The commercial-acumen of its people has created several successful businesses and resultant business income. While it has the high Gini-coefficient amongst OECD nations, its mid-30s score ranks better than most countries globally. All this combines into a wide catchment-base of high income and high wealthsomething stock market securities cannot ignore. This is a compelling reason for Indian companies to think about co-listing in Israel, just like they co-listed on US and UK exchanges in the past.
In the end, while Israel and India need to build awareness of this opportunity, the bigger need is to create awareness amongst the societies and to break preconceived notions. That is one reason why India-Israeli business linkages still seem muted in comparison to the scale of outreach their governments have done. Co-listing of Indian securities might not only benefit the market participants but may also help in a deeper understanding of the business-sectors a win-win for long-term engagements.
Original Source: The Times Of Israel