GILBERT GNANY, CHAIRMAN OF THE MCB INDIA SOVEREIGN BOND ETF : “Looking forward to a more economically buoyant India”

Gilbert Gnany, Chief Strategy Officer of MCB Group, is also the Chairman of the MCB India Sovereign Exchange-Traded Fund. Launched last year, the world’s first ETF, focused on India’s sovereign bonds, has performed remarkably well. Its prospects seem as bright with India set to further entrench its position as an upcoming economic superpower.
In June 2016, true to its innovative and pioneering culture, MCB Group – through its non-banking financial subsidiary specialising in the provision of investment related services, namely MCB Capital Markets Ltd – launched the MCBIndia Sovereign Bond Exchange-Traded Fund, in partnership with ZyFin Holdings Pte. Limited (ZyFin). In fact, the Group has set out to bring something truly unique to the ETF market, which is already composed of about 5,000 ETFs worldwide.
The Economic Times last year designated the MCB India Sovereign Bond ETF as “the world’s first Exchange Traded Fund focused on India’s sovereign bonds”. Fundamentally, the MCB India Sovereign Bond ETF aims to deliver dedicated access to international investors to the Indian sovereign bonds market. Its underlying objective is to provide investors with regular short-term returns through the payment of half-yearly dividends and longer-term capital appreciation by replicating the ZyFin India Sovereign Bond Liquid Index which tracks the performance of the most liquid, fixed-rate and INR-denominated bond issued by the Government of India.

Why did you choose to launch an ETF on such an underlying objective as to provide investors with regular short-term returns through the payment of half-yearly dividends and longer-term capital appreciation?
We have embarked on facilitating our clients’ investments onto the attractive commercial prospects presented by India. The first obvious reason is of course the attractive yields that Indian sovereign bonds continue to offer. When we launched the ETF last year, yields in INR terms were around 7.5% p.a. on the 10-year paper. It has now receded slightly to below 7% p.a. but still remains very attractive.
According to the IMF, India’s GDP grew 10-fold as from 1985 before reaching USD 2.3 trillion in 2016. Looking forward, India is expected to chalk an average real GDP growth rate of 7.8% p.a. over the 2017-2021 period. Over the medium to long term, India will need to fund its ambitious national development programme, which will tend to fuel the growth of its sovereign debt market. Already, GSecs are not only one of the largest bond markets in Asia, with outstanding issuances currently standing at around USD 700 billion, but are also considered to be amongst the safest bonds in the world as they are guaranteed by the Indian government and hence benefit from India’s investment grade status. Indeed, let me point out that despite domestic and global crises, India’s sovereign credit rating has not been downgraded for more than a decade. This is reflected in attractive yields achieved on 10-year Indian government bonds, which currently hover at around 6.8%, in Indian rupee terms. Even if, in US dollar terms, past returns have been lower because of the relative depreciation of the Indian rupee from January 2008 to September 2013, but broadly stabilised in the wake of recent policy measures taken, notably since the coming into office of Prime Minister Shri Narendra Modiji, as India enters a new phase of its growth trajectory.
Whilst Indian government bonds are an attractive investment, investors globally find it hard to access these securities. They are confronted with a relatively lengthy regulatory approval process to obtain a Foreign Portfolio Investor (FPI) licence. Besides, in addition to the existence of a competitive bidding process, there are caps on foreign ownership of Indian government bonds, as well as a relatively high minimum ticket size standing at equivalent to around USD 750,000, for an investor to trade on the main sovereign debt board. Whilst smaller amounts can be traded on the secondary board, liquidity is quite limited and yields are relatively less attractive. This is exactly where the attractiveness of the MCB India Sovereign Bond Exchange-Traded Fund lies. Our Fund enables both institutional and individual investors looking to diversify their fixed income portfolio to get seamless access to the Indian sovereign bond space by putting as little as USD 10 per share (I should rather say USD 11 now due to the price appreciation). Liquidity is also guaranteed by the market maker who ensures that there are offers and bids on a daily basis to allow investors to get in and out of the ETF in a seamless process. Let me also highlight that we have deliberately chosen to domicile this Fund in Mauritius because the country is an International Financial Centre (IFC) that enjoys strong commercial ties with India and, as such, can offer investors a prime point of entry into Indian bond market, particularly by virtue of Mauritius’ standing as the largest source of foreign direct investment into India. Additionally, I would like to stress that the MCB India Sovereign Bond ETF is not impacted by the new provisions relating to the India-Mauritius double taxation avoidance agreement, with investors still benefiting from the favourable tax rate of 5% as applicable on the coupons received by the fund.

How has the ETF performed so far?
The Fund has recorded a notable performance so far, with the return achieved notably benefiting from relatively favourable exchange rate dynamics and capital appreciation linked to interest rate cut and increased liquidity driving yields down.
For the first 10 months, the NAV of the ETF grew to USD 11.10 as at 5th April 2017 on an ex-dividend basis. If we add the recently declared dividend of USD 0.32 per share which represents a yield of 3.2% in USD terms to investors who subscribed to the ETF shares at USD 10.00 in June 2016, total return is above 14% in USD since inception. In line with its objective, the ETF distributes all net income twice yearly. Coupons earned from the underlying bonds (currently above 7% p.a. in INR terms) are paid net of the ETF fees (0.99% p.a.) in the form of dividends (non-taxable in Mauritius). Based on such coupon rates, we expect to be able to pay to our investors a dividend which is equivalent to a yield of 3%-5% p.a. in USD terms.

What has been the impact of the demonetisation of notes in India, if any, on the performance of the ETF?
Another contributor to the good performance of the ETF has, in an almost unlikely way, been the demonetisation process. When the Indian government decided to remove the old notes from circulation and replace them with new ones, everybody rushed to bank a lot of cash which were not reported in the formal system previously, creating a lot of liquidity at the banks level which had the effect of pulling down yields on the fixed income markets, thus benefiting our MCB India Sovereign Bond ETF. From a general viewpoint and as stated by the IMF, the demonetisation presents an opportunity to increase the size of the formal economy and broaden financial intermediation in the longer term. It can also support a widening of the tax base, help reduce the fiscal deficit, enhance bank liquidity and give a fillip to the government’s efforts to promote greater financial inclusion.

What is your outlook on the Indian economy?
Over the past few years, the Indian economy has pursued a noticeable growth path, underpinned, amongst others, by terms of trade gains, the execution of targeted policy initiatives and a relatively favourable external context. Moving forward, while it is true that the implications of the demonetisation process have, in recent months and in particular, exerted pressures on the country’s growth momentum, the Indian economy is set for a bright future. Interestingly, in spite of facing up to strains associated with the volatile international financial markets, tepid global trade patterns and domestic dynamics, the Indian growth outlook remains generally positive. Indeed, as recently stressed by the IMF real GDP growth is forecast to stand at 6.6% in the current fiscal year before improving to 7.2% in the following year, as economic reforms enunciated by the Government kick in.  This optimism is generally shared by Moody's Investors Service. The latter expects the Indian economic growth to continue to pick up as liquidity conditions normalise, thus, in the process, validating expectations that the disruption caused by demonetization will be short term in nature. Yet, over the medium, it is hoped that the Government achieves sustained progress in implementing its structural reforms and further enhancing the quality of the business environment. This will help to accelerate the country’s socio-economic development, while further reinforcing its prominence on the global trade and investment scenes.
Arun Jaitley, in his Budget Speech 2017-2018, highlighted that “India stands out as a bright spot in the world economic landscape.  India’s macro-economic stability continues to be the foundation of economic success.” I look forward to an even more economically buoyant and even more transformed India. In fact, I earnestly hope for a stronger India, which will help to deepen the already special relationships that it has forged with Mauritius and further entrench its position as an upcoming economic superpower in the global landscape. I think that, with the commitment of all stakeholders, there is no reason why India cannot successfully meet its ambitious endeavours.