OREANDA-NEWS. May 13, 2015. While these two indices maintained a 97.5% return correlation, some statistical divergence was observed in the comparative performances of the SGX CNX Nifty Index and the MSCI India Index.  The CNX Nifty index lost some steam with a 1.11% decline YTD while the MSCI India Index was only down 0.10% YTD. This is in contrast to first quarter (Jan to Mar 2015) which saw 2.48% and 4.18% returns for Nifty and MSCI India indices.

Source: Bloomberg

The same was observed in the SGX CNX Index Nifty Futures (IN) and the MSCI India Index Futures (MD). The two futures contracts saw a 1.74% differential in year-to-date performances with IN yielding -1.76% while the MD yielded -0.02%

Spread Trading Parameters

Spread trading allows traders to have exposure on the relative performance of one index over another. In the case of two indices on the same stock market, the spread trade is largely uncorrelated with the indices themselves, presenting a qualitatively different opportunity.  Changes to financial fundamentals can also affect price ratios, which shows the importance of understanding that past performances do not guarantee future results.

The contact size of the futures is US\\$2 x SGX CNX Nifty Index Futures price, which assuming a price of 8,000, provides a dollar value of US\\$16,000 per contract. The contract size of SGX MSCI India Futures on is US\\$50 x SGX MSCI India Futures price, which assuming is 1,000, provides a dollar value of US\\$50,000. Contract months roll on a two nearest serial months and Mar, Jun, Sep and Dec months on a one year cycle.

CNX Nifty Index / MSCI India ratio

The current price of the SGX CNX Nifty Index is near 8,190 and SGX MSCI India Index is near 1,020 implying a contract value price ratio of 8.03. Over the year-to-date the mean price ratio of the indices has been 8.08, with a high of 8.22 and low of 7.97. The price relationship is illustrated in the chart below.

Maintaining a minimal spread ratio for the SGX MSCI India Futures and SGX CNX Nifty Futures currently requires 3 Nifty Futures to one MSCI India futures contract. The exchange offers margin credits for trades between MD and IN Futures in different directions (long MD and short IN, or short MD and long IN). The table below summarizes the margin rates for outright trades and margin efficiencies for trades between MD and IN contracts.

Maintenance Margin

IN

MD
Outright Margin

USD 600

USD 1,500
Intra Commodity – between same futures but different contract months

USD 100

USD 500
Inter Commodity - between different futures

70% margin credit for 3 Lots of IN and 1 Lot of MD in opposite directions.

Eg. (3 * USD 600 + USD 1,500) * (1-70%) = USD 990

Source: SGX (Data as of 4 May 2015)

Comparing Sector Weightage in the India Indices (GICs Sectors)

The Nifty Index is heavier on financials and energy while the MSCI India index has a heavier weightage on information technology, consumer staples and health care. Here is a breakdown of the indices sector and equity weightage.

Company Name GICs Sector Name Weight in MSCI India Index Weight in CNX Nifty Index YTD Returns
Infosys Information Technology 10.39% 4.01% -2.74%
Housing Development Finance Corp Financials 10.02% 3.33% 1.15%
Tata Consultancy Services Information Technology 6.96% 8.83% -2.02%
Reliance Industries Energy 6.55% 5.13% 0.47%
Sun Pharmaceutical Industries Health Care 4.55% 4.03% 13.80%
ITC Consumer Staples 4.20% 4.69% -10.94%
Hindustan Unilever Consumer Staples 3.82% 3.45% 18.42%
Larsen & Toubro Industrials 2.88% 2.65% 4.34%
HCL Technologies Information Technology 2.63% 2.32% 15.31%
Mahindra & Mahindra Consumer Discretionary 2.33% 1.31% -3.62%
Tata Motors Consumer Discretionary 2.30% 2.88% 1.45%
State Bank of India Financials 2.27% 3.53% -16.91%
Dr Reddy's Laboratories Health Care 2.24% 1.02% 4.01%
ICICI Bank Financials 1.95% 3.28% -12.50%
Wipro Information Technology 1.93% 2.38% -3.01%
Vedanta Materials 1.50% 1.15% -1.96%
Coal India Energy 1.46% 4.10% -4.73%
Oil & Natural Gas Corp Energy 1.43% 4.81% -9.65%
Bharti Airtel Telecommunication Services 1.37% 2.84% 9.01%
NTPC Utilities 1.37% 2.09% -1.66%
HDFC Bank Financials - 4.39% 1.73%
Axis Bank Financials - 2.29% 5.15%
Kotak Mahindra Bank Financials - 2.16% 4.56%

Source: Bloomberg (Data as of 7 May 2015),weights computed using free float market capitalization.