Betting big

EDITORIAL

The agreement between National Stock Exchange (NSE) and Chicago Mercantile Exchange (CME) for trading of Dow Jones and S&P futures on the local bourse is going to change the way Indian investors look at the equity markets and the investment options available to them. Stocks markets are a way of participating in wealth creation and economic growth. Now, Indian investors will get an opportunity to participate in the US growth story. This is a major positive for the deal. The S&P 500 comprises stocks of 500 large cap American companies, accounting for more than 75 per cent of the US equity market in terms of market capitalisation. Sitting in India, you will now participate in the US story by just buying and holding a few contracts of S&P 500 futures. There is one major reason why the development will benefit investors and traders alike. There are strong chances that when the US economic recovery gains momentum, we are likely to see a phase where equity markets of developed nations will fare far better compared with emerging markets. So when that phase comes, Indian investors could switch to investing in the Dow Jones industrial average (DJIA) instead of Nifty, and in the process, book major gains. Nifty is already among the most popular global indices and the India focused exchange traded fund (ETF) has become very popular in the past few years, with investors using it to participate and take advantage of the India growth story Though Indian investors also have had the choice to take exposures in certain overseas mutual fund schemes and ETFs, that choice has been very limited so far. Now with the indices of the world’s largest exchange available in domestic market, the tie-up between NSE and CME is the first true step towards providing a global product to Indian investors. The more products available to investors will make them that much less dependant on the functioning of a particular economy. NSE should also tie up with some of the other major exchanges so that their indices are also traded on the Indian bourse. We would like to caution that certain hurdles might emerge when S&P 500 and Dow Jones futures are introduced in India. These would, however, affect traders rather than investors. Our advice for investors is to take a view of the direction of the US equity market to buy, sell or hold their positions for a few months. Should long duration contracts also be introduced, they could take positions on Dow Jones futures for a couple of years rather than track day-to-day movements of the US markets. As for traders, they need to take higher risks when buying Dow futures during local market hours and then wait for the next morning to either sell or buy on the basis of overnight movements in the US market. Given the way Dow reacts to various data, such as employment figures, GDP growth and confidence index, among others, Indian traders are going to find it tough to trade with strong conviction levels. Dow futures traded on other Asian and European markets fail to predict an exact picture of how the US market will open. Yet, traders must necessarily bear these risks that are integral to their participating in the stock market. This is truly a moment for Indian investors to enter the big league.