Citigroup’s trigger PLUS tied to WisdomTree India Earnings ETF offer exposure to ‘bright spot’

By Emma Trincal

New York, March 16 – Citigroup Inc.’s 0% trigger Performance Leveraged Upside Securities due April 5, 2017 linked to the WisdomTree India Earnings fund offer a growth opportunity for emerging markets investors who have picked India as a “bright spot” amid a sluggish asset class.

On Thursday, Christine Lagarde, head of the International Monetary Fund, said that India is “a bright spot” in the global markets due to recent policy reforms and improved business confidence. She expects growth to pick up to 7.2% this fiscal year and accelerate further to 7.5% next year, “making India the fastest growing large economy in the world.”

The final payout of the notes will be par of $10 plus two times any fund gain, up to a maximum return of 30%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the shares fall by up to 15% and will be fully exposed to the decline if the fund falls below the 85% trigger level.

Best of BRICs

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said the notes offer “decent” opportunities for investors bullish on India, an emerging market that has fared better than most of its peers.

“I’m not at all bullish on emerging markets. In fact, I am bearish,” he said.

“But India is a little bit different from most emerging markets. It falls into a different category because it has definitely implemented some reforms. The country is stronger than the other BRICs.”

The acronym “BRIC” stands for Brazil, Russia, India and China.

The WisdomTree India Earnings fund is up 4.90% this year versus 1.05% for the S&P 500 index. The Indian ETF has gained 30% over the past 12 months, compared with 13.6% for the U.S. benchmark and 5.50% for the iShares MSCI BRIC index fund, which tracks the performance of the BRIC countries.

India was the top-performing emerging market last year, according to the S&P Global Broad Market index.

“We like the Indian stock market in general. There are definitely some positive developments happening in that country in terms of reforms,” said Chisholm.

“Internationally, however, there are a lot of potential issues since the dollar is so strong. But India seems to have weathered it very well in the last year, at least in the stock market.”

‘Reasonable’

Commenting on the terms of the notes based on the fund’s Monday morning price of $23.00 a share, he said that “you’re effectively looking at $3.50 per share downside protection and a $30.00 cap. I think that’s reasonable over the next two years. I expect India to outperform the other BRICs countries in that timeframe. It’s a country that’s in much better shape than a lot of its competitors. The 15% downside protection is decent, although it’s certainly possible to breach that type of barrier. Early last year, the ETF was down 16%. But it has done really well since then.”

Chisholm added that he likes the underlying fund.

“A number of Indian ETFs have a very concentrated portfolio of stocks. I’ve seen some with 30% in one company. This one is not so bad,” he said.

The top holding in the fund portfolio is Infosys Ltd. with an 8.27% weighting, according to the WisdomTree website.

Despite the recent bullish statement from the IMF, Chisholm said that the Indian economy is not immune to shocks.

“They’ve definitely implemented some reforms. The country is much stronger than it was. But I don’t think economists’ growth predictions have a lot of credibility,” he said.

“Things can happen. If we start to go into a tailspin, India is not going to be safe. While this is a country that has a lot of good metrics, should things turn sour on the global markets, you could easily see a spillover into India.”

Risk-reward

Paul Dietrich, chief executive of Fairfax Global Markets, said that despite India’s strong market performance, the risk-adjusted return of emerging markets in general and India in particular offer little appeal in relative value.

“It’s hard to be bullish on most emerging markets right now when we have so many good opportunities here in the U.S. and when Europe is selling at a discount,” he said.

“There’s no question that we’re seeing a bottoming out in China, in India, in Asia in general.

“But how long it takes for a real turnaround, that’s what’s not clear.

“For now, I have yet to see a lot of money flowing into emerging markets. They’re still looking risky compared to the U.S. or Europe.”

Dollar, oil

The strong dollar appreciation adds another risk factor for emerging markets, he said, although the picture varies country by country.

“For countries like China and India, which are huge petroleum users, the drop in gasoline price is enormously helpful, and its benefits are being felt even with the higher dollar,” he said.

Emerging markets that export commodities also benefit from having a weak currency against the dollar, he explained. But on the other hand, a stronger dollar increases the cost of importing commodities for a country like India, which depends on imports for precious metals, coal and steel.

Holding the notes linked to the WisdomTree India Earnings fund for two years with a 15% contingent protection is not an attractive proposition, he said.

“You have 15% on the downside. It’s still a risk. You can go in and out yourself if you’re an active manager. We’re active managers, and we look at risk management on a daily basis. There’s a way to manage risk, no question about it. The question is, is it worth it?

“I’d rather jump into the market when I think we’re starting to see the boom. Although I think China and India are good prospects, I look at the underlying economies, and I’m not sure an equity exposure is justified at this point.”

The notes (Cusip: 17323B612) are expected to price March 31.

Citigroup Global Markets Inc. is the underwriter with Morgan Stanley Wealth Management as the dealer.

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