The Hindu Business Line : ‘Pension funds, insurance cos seeking Indian equities’

Kolkata, Oct. 24 Merrill Lynch, which has now moved India up from “under-weight” to “market-weight” in its recommendation for asset allocation, feels pension funds and insurance companies are seeking greater access to Indian equities to boost their returns.

In a report published last week by Merrill Lynch strategists, Mr Mark Mathews and Mr Willie Chan write that pension funds and insurance companies have traditionally avoided investing in emerging markets, such as India and China, because of their index-clinging investment strategies.

Index benchmarking

Broadly, the MSCI World Index weights guide their investment patterns. The Indian and Chinese equities still occupy just a small weight of 2.5 per cent of the MSCI World.

These large, and generally long-term, investors had missed out on the India story so far. Some of them, at best, briefly gravitated towards hedge funds through overseas derivatives instruments. But hedge funds’ high performance fees and irregular dissemination of Net Asset Value figures have turned them off

The report underlines the current change in tact among these investors and a new beginning. The forthcoming simplification of registration rules by the regulatory authority may hasten the process further, an investment officer with another foreign investment outfit said.

It’s India!

Merrill Lynch justified its latest change in recommendations and said that being overweight on China, while remaining underweight for India, was incongruous “given the fact that they share same headwinds and tailwinds.”

It further said that five years ago India was a great bottom-up story. “Today it is more expensive — a ten-year average PE for India is 16x forward earnings — but has a very strong top-down story, like China, and that is what is moving it.”

The strategists observed: “We can sense something is changing in the investment landscape”.

Still low weightage

The history of benchmarking goes back to 1980-2000, when the big developed markets were witnessing a secular bull run.

Since 2002, developed markets have lagged behind the emerging markets.

Yet, the benchmarks are still heavily weighted towards developed markets.

Emerging markets are only 10.6 per cent of MSCI World Index, despite the fact that they (emerging markets) contribute 30 per cent of world GDP and 55 per cent of global growth in absolute terms and 75 per cent in purchasing power parity terms.

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