RESEARCH Equity CONTRIBUTOR Mahavir Kaswa, CFA Measuring Indian Equities: Associate Director Product Management The S&P BSE 500 S&P BSE Indices [email protected] The S&P BSE 500, which launched in 1999, is one of the most popular broad benchmarks of India’s capital market. With a rich history of more than 18 years, the index has captured all major events—from heightened activity seen during numerous bull and bear runs, including the information technology boom and then bust in 2001, the bull market rally ending in 2007, the 2008 global financial crisis, and later the regional shocks seen globally. This paper discusses the construction and attributes of the S&P BSE 500 and compares it with other popular equity indices in the Indian market. EXECUTIVE SUMMARY Interest in Indian equities should continue to grow, as the International Monetary Fund (IMF) projects a growth rate of 7.4% in 2018 and 7.8% in 2019 for the Indian economy, putting it among the fastest-growing global markets of its size.1 The S&P BSE 500 is designed to measure the performance of the leading 500 Indian companies, and it covers more than 88% of India’s listed equity market capitalization. The S&P BSE 500 has historically exhibited low correlation to global markets, providing a potential diversification opportunity. The index offers diversified exposure to all GICS® sectors. The large-cap stocks account for nearly 79% of the index weight. The combined weight of constituents having individual derivative trading is 87%, which facilitates the hedging of the index portfolio. Thus, the S&P BSE 500 reflects a complete picture of India’s economy. Over the period studied, the S&P BSE 500 outperformed the S&P BSE 100 and S&P BSE 250 SmallCap Index, while it underperformed the S&P BSE 150 MidCap Index on an absolute and risk-adjusted basis over the long term. The financials sector, which constituted the highest average index weight over the past three years, contributed the most (nearly one- third) of the total returns of the S&P BSE 500. 1 International Monetary Fund. World Economic Outlook Database. April 2015. Measuring Indian Equities: The S&P BSE 500 August 2018 INDIA’S GROWTH STORY India has regained the tag of fastest-growing (large) economy, as the IMF1 projected India’s GDP growth rate at 7.4% in 2018 and 7.8% in 2019, whereas China (the second-fastest) was expected to grow at 6.6% in 2018 and 6.4% in 2019 (see Exhibit 1). India’s economy Since opening its economy in 1990, India has grown multifold and gained crossed the USD 1 greater importance in the global economy. India’s economy crossed the trillion size mark in USD 1 trillion size mark in 2007 and is expected to cross the USD 3 trillion 2007 and is expected to mark in 2018, which is approximately 3.4% of the global economy.1 With a cross the USD 3 trillion mark in 2018, which is projected GDP of over USD 3 trillion, the Indian economy is expected to be approximately 3.4% of the sixth-largest economy globally, between the UK and France.1 the global economy. According to a recent article by The World Bank,2 the growth in India’s GDP was primarily led by the services sectors (information technology, telecommunication services, and financials), followed by industrials, and finally a relatively stable growth in the agriculture sector. The report further stated that the growth has not just accelerated, but it has also become more stable over time. Since 1980, India’s 10-year rolling average GDP growth rate has shown an upward trend, demonstrating stability and more consistent GDP growth over time (see Exhibit 1). Exhibit 1: 10-Year Rolling Average GDP Growth Rate 12 10 8 6 4 2 Year Rolling Average GDP Growth Rate (%) Rate Growth GDP Average Rolling Year - 10 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 China - 10-Year Rolling Average India - 10-Year Rolling Average Estimate - China - 10-Year Rolling Average Estimate - India - 10-Year Rolling Average Source: International Monetary Fund, World Economic Outlook Database. 10-year rolling average GDP growth rate calculated with yearly GDP growth rate. Data as of March 31, 2018. Chart is provided for illustrative purposes. 2 The World Bank. “India Development Update.” March 2018. RESEARCH | Equity 2 Measuring Indian Equities: The S&P BSE 500 August 2018 INDIA’S GLOBALIZATION According to Ernst & Young Solutions’ 2015 India attractiveness survey,3 32% of the business leaders from global corporations polled for the survey said India is the most attractive investment destination in the world, followed by China, Southeast Asia, and Brazil. The survey found major improvements in perception from the 2014 survey in key areas such as macroeconomic stability, political and social stability, relaxation in foreign direct investment (FDI) policy, and the government’s efforts to ease doing business. In 1992, foreign In 1992, foreign institutional investors (FIIs) were first allowed to invest institutional investors in all securities traded on the primary and secondary markets, with a were first allowed to maximum cap of 5% in the case of a single FII and 24% for all FIIs.4 invest in all securities traded on the primary Since then, FII regulations have gone through numerous changes and and secondary have become increasingly more liberal. markets. Exhibit 2 shows India started receiving increasingly greater foreign investment in the early 2000s. The highest foreign investments were received during the financial year5 2014-2015; whereas major outflow was experienced during the financial year 2008-2009, the period of the financial crisis. Exhibit 2: FPI/FII Investments in India FPI/FII Investment Linear (FPI/FII Investment ) 300,000 250,000 200,000 150,000 100,000 50,000 0 -50,000 FPI/FII Investment (INR crore) (INR InvestmentFPI/FII -100,000 1993-1994 1994-1995 1995-1996 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 1992-1993 Source: National Securities Depository Ltd. Data as of March 31, 2018. Chart is provided for illustrative purposes. FPI: Foreign Portfolio Investors. INR 1 crore = INR 10 million. 3 Ernst & Young Solutions LLP, a member of the global EY organization. EY’s attractiveness survey: India 2015 “Ready, set, grow.” March and April 2015. 4 Sharma, Laksmi. "A Gap Analysis of FIIs Investments – An estimation of FIIs Investments Avenues in Indian Equity Market.” NSE News. December 2004. 5 The Indian financial year starts from April 1 and ends on March 31. RESEARCH | Equity 3 Measuring Indian Equities: The S&P BSE 500 August 2018 As illustrated in Exhibit 3, historically, India’s equity market has had average or low correlation to other global markets, providing a potential diversification opportunity. The Indian equity market noted its lowest correlations of 0.24 and 0.30 with the Japanese and U.S. equity markets, India’s equity market respectively. has had average or low correlation to other Exhibit 3: 10-Year Correlation of Daily Total Returns With Top 10 Countries by GDP global markets, providing a potential COUNTRY BRAZIL CHINA FRANCE GERMANY INDIA ITALY JAPAN RUSSIA UK U.S. diversification BRAZIL 1.00 0.34 0.62 0.62 0.36 0.57 0.16 0.56 0.65 0.60 opportunity. CHINA - 1.00 0.32 0.32 0.47 0.28 0.37 0.38 0.35 0.22 FRANCE - - 1.00 0.95 0.41 0.93 0.20 0.60 0.90 0.57 GERMANY - - - 1.00 0.43 0.89 0.19 0.60 0.87 0.60 INDIA - - - - 1.00 0.39 0.24 0.42 0.44 0.30 ITALY - - - - - 1.00 0.16 0.56 0.83 0.53 JAPAN - - - - - - 1.00 0.26 0.22 0.01 RUSSIA - - - - - - - 1.00 0.62 0.41 UK - - - - - - - - 1.00 0.56 U.S. - - - - - - - - - 1.00 Source: S&P Dow Jones Indices LLC. 10-year correlation calculated based on daily total returns of corresponding S&P Global BMI country indices except China (S&P China 500), India (S&P BSE 500), and the U.S. (S&P 500®) in USD. Data from Dec. 31, 2007, to Dec. 31, 2017. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance. CAPTURING THE INDIA STORY WITH THE S&P BSE 500 Over the past three to four decades, the Indian equity market has witnessed phenomenal growth, on account of increasing foreign capital flows and increasing participation by domestic institutional investors. The increasing depth and breadth has brought an increasing demand from market participants for suitable benchmarks. The S&P BSE SENSEX launched in 1986 and was the first and most popular Indian benchmark, followed by the S&P BSE 100 and S&P BSE 200 in 1989 and 1994, respectively. In 1999, the S&P BSE 500 was launched in response to market demand for broader benchmarks that offer more complete coverage of the Indian equity market. The Index Construction of the S&P BSE 500 The S&P BSE 500 is designed to be a broad representation of the Indian equity market, consisting of the 500 leading companies in terms of total market capitalization that are members of the S&P BSE AllCap.