>EXCHANGE TRADED FUNDS: How Do ETFs Generate Returns for Investors?

The price of an ETF share depends on the forces of supply and demand in the market and on the performance of the underlying index. Of course, the performance of the index is determined by the performance of each component stock.


In some ways, holding a share in an ETF is like holding a share of any company’s stock. If an investor buys a share of XYZ Company’s stock for $10 on Monday and sells when the share price rises to $20 on Wednesday, he or she has made a $10 profit. But if that investor sells on
Friday, when the price of the stock has fallen to $8, he or she will experience a $2 loss. The same holds true for ETFs.


Pricing, however, differs between mutual funds and ETFs. For a mutual fund, the price at which investors buy and sell shares is equal to the fund’s net asset value (NAV), less any commissions. The NAVs of both mutual funds and ETFs are calculated daily at the close of the markets. While investors can buy and sell mutual fund shares are any time throughout the day, all investors will receive the same transaction price (the NAV). In contrast, the price of an ETF share is continuously determined on a stock exchange. Consequently, the price at which investors buy and sell ETF shares may not necessarily equal the NAV of the portfolio of securities in the ETF. In addition, two investors selling the same ETF shares at different times on the same day may receive different prices for their shares, both of which may differ from the ETF’s new asset value. The price of an ETF share on a stock exchange is influenced by the forces of supply and demand.


For example, when investor demand for an ETF increases, the ETF’s share price will rise, perhaps exceeding the ETF’s net asset value. ETFs are structured, however, so that large differences between their share prices and their NAVs are unlikely to persist. Third parties calculate and disseminate every 15 seconds a measure often called the Interday Indicative Value (IIV), which is a real-time estimate of a fund’s NAV. When an ETF’s share price is substantially above this indicative value, institutional investors may find it profitable to deliver the appropriate basket of securities to the ETF in exchange for ETF shares. Retail investors may find it profitable to take a short position in the ETF’s shares. When an ETF’s share price is substantially below its indicative value, institutional investors may find it profitable to return ETF shares to the fund in exchange for the ETF’s basket of securities. Retail investors may find it
profitable to take a long position in the ETF’s shares. These actions by investors help keep the market-determined price of an ETF’s shares close to the NAV of its underlying portfolio.


RISH TRADER

>EXCHANGE TRADED FUNDS: Application Of ETFs

■  Efficient Trading: ETFs provide investors a convenient way to gain market exposure viz. an index that trades like a stock. In comparison to a stock, an investment in an ETF index product provides a diversified exposure to the market. Depending on the index, investors may obtain exposure to countries/ markets or sectors.


■  Equitising Cash: Investors with idle cash in their portfolios may want to invest in a product tied to a market benchmark like an index as a temporary investment before deciding which stocks to buy or waiting for the right price.


■  Managing Cash Flows: Investment managers who see regular inflows and outflows may use ETFs because of their liquidity and their ability to represent the market.


■  Diversifying Exposure: If an investor is not sure about which particular stock to buy but likes the overall sector, investing in shares tied to an index or basket of stocks provides diversified exposure and reduces stock specific risk.


■  Filling Gaps: ETFs tied to a sector or industry may be used to gain exposure to new and important sectors. Such strategies may also be used to reduce an overweight or increase an underweight sector.


■  Shorting or Hedging: Investors who have a negative view on a market segment or specific sector may want to establish a short position to capitalize on that view. ETFs may be sold short against long stock holdings as a hedge against a decline in the market or specific sector.


RISH TRADER

>INDIA STRATEGY- ECONOMY: Growth should be the focus of RBI/government

CRADLE OF PESSIMISM



FY12 turned out to be a year of reckoning for most countries. India witnessed rapid slowdown in growth, coupled with near double-digit inflation. Accordingly, we also had to tone down many of our optimistic assumptions. With the uncertainties persisting, we now focus more closely on the coming quarter (1QFY13), while annual projections would remain a critical input for our forward-looking assessment.


■  We estimate inflation at 6.5% for March 2012 and at 6.2% for 1QFY13. These estimates have seen some upward revision in the last couple of months, led by global crude prices, budget proposals, electricity tariff hikes and pending fuel price hikes. These factors have also led us to revise our average inflation estimate to 6.8% for FY13 from 5.6% earlier. We believe inflation would remain within the 6.5% level for a major part of FY13 and will inch above 7% only after December 2012. This presents a reasonable 8-month window of opportunity for the RBI to first ease rates and then pause, as inflation begins rising once again in December 2012. We expect the RBI to cut rates by 100bp in CY12.



■ The liquidity deficit persisted through FY12, but became aggravated during 2HFY12. The government/RBI has also scheduled a larger part (65% of gross and 59% of net) of borrowing for 1HFY13. Some softening of the liquidity situation is likely in April-May 2012, but should firm up once again due to large net borrowings, slowing money supply growth and stress from the external situation. To tide over the liquidity problem, we expect the RBI to undertake open market operations (OMOs) totaling INR1.8t during FY13.


■ The latest BoP data indicates significant stress on the external situation. While merchandise trade volume has declined in 3QFY12, invisibles have been failing to grow for some time. Trade and current account gaps are reaching their record levels at 10% and 4%, respectively. The scenario is unlikely to improve much in FY13 due to multiple headwinds, including weakness in the western economies, high oil prices, etc. Additionally, the INR is vulnerable to inflation. Considering these factors, the exchange rate should hover at INR50-52/USD barring  unexpected developments in balance of payments (BoP) or inflation.


■ Policy flip-flops in many key areas of reform coupled with the coming together of various macroeconomic risks have heightened uncertainties prevailing in the market. While many factors such as coalition politics, political bickering, strained relationship between the government and the judiciary and general lack of governance has been held responsible for this, the combined impact of these events has taken a toll on the investment cycle and attractiveness of India as a destination for foreign capital. We believe meaningful progress in some of these areas is necessary to restore investors’ confidence.


To read report in detail: INDIA STRATEGY
RISH TRADER

>TIGER AIRWAYS HOLDINGS LIMITED: Potential merger with Scoot or takeover by majority shareholders SIA and Temasek is possible in the longer term

Ready to take-off after the turbulence; initiate at OW


■  Initiate at OW with Jun-13 PT of S$0.90: Tiger Airways’ (TGR) share price has rebounded by 19% and outperformed the market by 6% ytd, following its 62% decline and 45% underperformance in the past 12 months largely due to the negative impact of Tiger Australia’s suspension and capacity indigestion in FY12E. Although the near-term outlook is challenging and current valuations look unattractive given TGR’s low earnings base, we believe the expected earnings turnaround in FY13 and our c.108% pa net profit growth in FY14-15 has not been priced in. Our PT implies a 22% upside from the current share price.


■  Strong earnings turnaround expected: With the normalization of Tiger Australia’s operations and continued passenger/ancillary income growth, EBITDAR margins are likely to return to c.21% in FY13, similar to the FY10-11 level, after falling to c.5% in FY12, and rise to c.29% by FY15 with greater economies of scale. FY13-15E average c.4% ROA, c.18% ROE and c.7% ROCE are above the Asian airline sector. TGR benefits from the strong financial backing of majority shareholders Temasek and SIA.


■  Other positive drivers: 1) New JVs SEAir (Philippines) and Mandala (Indonesia) could help drive Tiger’s earnings growth and regional franchise in these fast-growing markets. There is upside risk to our forecasts if these JVs turn profitable earlier than expected. 2) Move to Changi Airport T2 could help boost traffic feed given its closer operating proximity to a significantly larger critical mass of airlines. 3) Potential collaboration with Scoot could drive synergies. A potential merger with Scoot or takeover by majority shareholder SIA is possible in the longer term, in our view.


■  Valuation, key risks: Our Jun-13 PT of S$0.90 is based on 11x 12M fwd Adj. EV/EBITDAR, in line with TGR’s historical average valuation since Tiger Australia’s suspension and supported by the recovery of TGR’s EBITDAR margin to 21% in FY13E and 29% by FY15E vs. 20% for sector peers. Key risks: 1) rising fuel prices; 2) Tiger Australia’s recovery stalls; 3)weaker S$; 4) execution risks in SEAir and Mandala JVs; and 5) potential equity-raising to fund aircraft capex if sale & leaseback options become unattractive.


To read report in detail: TIGER AIRWAYS
RISH TRADER