Wipro ADR trading at a premium of 50% to domestic stock!!

Yups you read right! The Wipro ADR (ratio 1:1) is trading at a premium of 50% to the domestic stock. Lets look into the why’s of it, how investors stand to benefit and the possible way forward.

Considering the ADR and local stock are for the same company, ideally they should trade at similar prices, adjusted for exchange costs. However, it is found that most of the ADRs generally trade at a premium or discount to the local. The reason for discrepancy in prices of ADRs and local stocks is many-fold. Various reasons are demand for the stock (ADR) in foreign market, limited supply of ADR and difficulty in conversion of local shares to ADRs. ADR’s of Indian companies command a premium to their domestic counterparts due to demand mainly from Exchange traded Funds (ETFs), as it is easier for foreign investors to take exposure in Indian companies via the ADR route rather than going through regulatory approvals in India. Preference for trading in local markets also plays an important part. The premium is also due to difficulty in converting common shares to ADRs, which makes it difficult for arbitrageurs to execute trade.

Coming back to the Wipro ADR. Back in January 2007, the ADR was trading at an average premium of approximately 20%. The premium was totally eradicated in March 2008. However, since then the premium again started widening, reached 58% in October 2008 and peaked at 80% in Dec 2008 before reducing to a premium of 30% in May 2009. Over the past 1 year the ADR has traded at an average premium of 48%. So how does one benefit from this discrepancy in prices? The answer is arbitrage. One way would be buying the stock from local market, converting it into the various levels of ADRs and then selling these in the foreign market. Investors in local shares also benefit in a sponsored ADR program by tendering in their shares.





Going ahead, the Indian finance ministry’s recent mandate at requiring a minimum public shareholding of 25% in listed companies may play a vital role in reducing the Wipro ADR premium. As of March 2010, Azim Premji and family held approximately 80% stake in the company, which would require them to dilute the stake by around 5%. The ideal option in this case would seem the ADR route considering they would get a premium for the shares issued there. This may in-turn result in increased ADR volumes and subsequently reduced premium for the Wipro ADR in times ahead. Reminds me of the saying…if possible…’Make hay when the sun shines!’

Stocks mentioned here are: ADR ticker: WIT US, Domestic ticker: WPRO IB

Current Global Economic Scenario: Problems and possible solutions

The global financial meltdown has resulted in depressed economic conditions worldwide. The crisis which surfaced in July 2007 in US spread to other parts of the world leading to stock market crashes followed by long period of stock market volatility, credit crunch, failure of a number of leading financial organizations and rising unemployment. The impact was seen across the world be it the US, Japan, European countries or developing nations. Although governments across the world stepped in and announced a number of stimulus packages to help economic recovery, the crisis is far from over. According to the mid-year report by United Nations (UN), the global economy is expected to dip by 2.6% in 2009, with weakness extending in 2010 if the stimulus packages fail to fan economic recovery. Further, the report states that developing countries are the worst hit due to the recession as although they have been badly hit by rising capital costs, capital reversals and falling world trade, 80% of the global stimulus package (amounting to US$2.6 trillion) is concentrated in the developed world. So what should be the all encompassing solution to this problem? Are the measures being taken by governments across the world enough or do we need to make some additional efforts? The solution seems to be in restoring the financial system, the backbone for any kind of economic growth. In addition, proper alignment of the fiscal stimulus is needed with a view to global development and not concentrate on development of individual nations. Corrective actions need to be taken to ensure the fundamental problems giving rise to this kind of situation (regulatory or otherwise) are dealt with and resolved.

Emerging markets: have they really decoupled from the rest of the world

To answer this question one would have to look at what exactly is decoupling. Decoupling, as has been defined in the traditional sense, means the ability of emerging countries to grow without any stimulus from developed countries, primarily the United States. The April 2009 World Economic Outlook by International Monetary Fund (IMF) seems to support this phenomenon. According to the April 2009 World Economic Outlook by IMF, emerging market and developing countries outgrew the advanced nations in 2007 and 2008. Further, the report expects advanced economies to contract by 3.8% y-o-y in 2009 (United States to contract by 2.8% y-o-y) and growth is expected to remain flat in 2010. This compares with a +1.6% y-o-y and +4.0% y-o-y growth estimated for the emerging market and developing countries in 2009 and 2010 respectively. The world economic conditions have since improved, and the forecasts are expected to improve when IMF comes out with its revised forecast in autumn, but what remains the key take-away here is the fact that emerging market growth has outperformed the advanced countries in the past and the trend is expected to continue going forward.

World output growth 2007 – 2010

Source: IMF, April 2009 World Economic Outlook


Given the above facts is it prudent to conclude that the decoupling has indeed happened? And if indeed it has then what are the factors behind it?

Economic liberalization and globalization have been the key words in the world economic scenario for the past two decades and has let to a number of benefits, especially for the developing economies in the form of increased economic activity and improvement in the standard of living. Improved economic conditions and standard of living in turn has driven domestic demand within the developing countries, a form of shield for the developing countries from the broader negative happenings across the world - decoupling (although not in entirety).

Considering the base of decoupling itself lies in globalization how long can the emerging markets/developing nations continue to grow when the advanced nations are reeling under economic weakness. It is possible in the near term for the developing countries, especially India and China, to grow based on strength of domestic demand and mitigate the impact of global weakness but the long term success of any economy in today’s world of globalization is linked and entwined. The plummeting of equity indices around the world, including those of the emerging markets, post the financial crisis in United States is proof of the growing dependence of nations on one another. Prolonged global crisis would mean declining exports, drying- up of foreign investments and reduced cross-border lending. Reduced investments and exports would mean liquidity issues even for domestic companies, reduced economic output, rising unemployment, slowdown in the domestic economy and rising deficits. Besides, with reduced inflow of money and rising deficits, implementing fiscal policies would become very difficult for governments of developing nations. Thus to say that emerging markets have decoupled would be jumping to conclusion too soon. Having said that it would also be impertinent to totally ignore the strength of some of the emerging countries, particularly China, where government stimulus and spending is almost on par with some of the developed nations and is driving demand growth not only domestically but even in some sectors of the United states. So instead of arguing over if emerging economies have decoupled, a better idea would be to accept that a few of the developing nations are coming into their own, and if not dependence of emerging countries on the United States, in future it could be dependence on United States and China or dependence on China instead of United states. For now the dependence continues to exist and it is not only of the developing nations on some other nation but dependence of economies on one another, be it of the developing nations or of the developed nations.

-Shazia Naik
(Dated: 04 July 2009)