The downside to index tracking
Carnegie Indienfond fell 4.1 % this month.
Around forty cases of coronavirus were registered in India this past week. All appear to have been infected abroad. India already has plenty to deal with, solving major structural problems.
The telecom sector has long suffered with profitability problems. The government needs money and wants the fees for its licences. Bharti Airtel paid part of its debt, but Vodaphone/Idea instead announced it could be forced into bankruptcy. This risks further fuelling bad debt losses in the banking system, not least for State Bank of India, Yes Bank and Indusind Bank, which are exposed to Vodaphone/Idea.
The government hopes to privatise several companies, including Bharat Petroleum, which could be interesting to Saudi Aramco. Mukesh Ambani also wants to sell oil assets from his company, Reliance Industries, to Saudi Aramco. However, the government has guaranteed itself first refusal by ensuring India’s Supreme Court will block a sale of Reliance Industries’ refinery assets.
Yes Bank, which has long been a lemon, is restructuring, with State Bank of India becoming the owner. The board of directors has been discharged and the bank’s assets have been frozen for a month. Customers are prevented from withdrawing money from their accounts. Anyone who invested in its bonds appears to be unlucky. The restructuring creates more issues than it solves thus far.
A large part of the foreign capital invested in India in recent years comes from passively managed funds, index trackers or ETF structures. These invest in all companies according to their weigh in the index, regardless of operations and profitability. This is fine when the stock market rises. Everyone gets richer and happier.
But it is not quite the same story when the tide turns, as was very apparent this past week. The stock exchange is led downward by heavyweight index companies; Reliance Industries, the banks, finance companies and India’s big IT companies Infosys and Tata Consultancy. As you know, Carnegie Fonder does not work in this way, which means our fund performs better in stormy weather.