India poised to take advantage as China applies brakes

(June 7, 2004) Investors seeking a high growth component for their portfolio face a wealth of choices, ranging from individual equities and small cap funds to sector specific investments and emerging markets. When setting their sights overseas, the recent trend has been to invest in China, as the massive market lurches toward prosperity.

While there has been a great deal of talk about the investing opportunities in China, hype around India as the “next big thing” has been relatively subdued.

That’s not to say there has been no ink spilt on the topic of the sub-continent. Bhim Asdhir, president and CEO of Excel Funds, offered his audience at last week’s Independent Financial Brokers of Canada (IFB) education summit a folder packed with clippings from the world’s leading investment publication praising India’s economic reforms.

While India plays a part in many Asian and Asia-Pacific mutual funds, Asdhir’s Excel India Fund appears to offer the only pure-play in Canada.

Goldman Sachs is predicting that by 2050, India will be the world’s third largest economy after China and the U.S., and larger than the next seven largest economies combined. But this growth is not yet reflected in the Indian stock market.

The forward price-to-earnings ratio for the Indian stock market is currently about 10 times, whereas the S&P 500 has historically traded around 17 times current earnings. Third-quarter earnings growth for the top 500 companies on the Mumbai Exchange is expected to come in at an average of 30%, with the fourth quarter expected to post 47% growth. S&P 500 earnings growth is estimated at 21%.

“If you look at it from the demographics, the growth and demand and so forth, it makes a lot of sense to be invested in India,” says Asdhir. “And with [price-to-earnings] ratios that low, it makes double the sense.”

China’s reliance on exports to drive its manufacturing sector could leave the behemoth at the mercy of external factors. The U.S. has already complained about Beijing’s refusal to let its currency float freely and China has indicated it may soon relinquish its monetary advantage.

Asdhir believes India’s economy, on the other hand, is internally driven. The country has seen an explosion in its high-tech sector, creating a middle class of over 300 million people in about a decade. This new middle class is hungry for the trappings enjoyed by their western counterparts, driving the market for everything from cell phones to motorcycles.

“The younger generation is very aware that education is what’s going to take them from being poor to being middle class,” said Asdhir. “For every one person graduating in China, there are six graduating in India.”

The youth demographic is not only well educated, but massive, with over 35% of India’s population under the age of 25. This young society promises a stable, productive workforce, according to Asdhir, which could surpass China as a manufacturing base for the West.

China’s one-child rule and the cultural preference for male children have left the country demographically unbalanced. India has never enacted such a rule and as a result, its population should continue to grow, perpetuating the market.

Still, compared to China, India’s marketing department seemed to have fallen behind. But the Indian stock market received more than its fair share of attention last month.

The Sensex market index, India’s equivalent of the Dow Jones Industrial Average, fell 17% on May 17, 2004, following election results which installed a perceived left-leaning coalition led by the Congress Party.

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The nosedive may have attracted bargain-hunters, seeking to capitalize on India’s economic growth. Asdhir said the market “dip” represented a buying opportunity — and for an investor already convinced of India’s merit, it may be hard to argue otherwise. The index has bounced back somewhat on news that key positions in the new government would be held by prominent economic reformers.

After some talk the government would be led by Sonia Gandhi, the prime minister’s office was eventually filled by Manmohan Singh, the former finance minister who started India down the road to reform in the early 1990s. The new finance minister is P. Chidambaram, another reform-leaning former finance minister from the late 1990s.

Of course, investing in developing markets is inherently more risky than staying domestic, due to currency fluctuations and issues of political stability. While India is the world’s largest democracy and enjoys smooth transfers of power, it still suffers from occasional spasms of ethnic violence.

The country is also subject to extreme weather conditions and persistent drought or flooding can wreak havoc on the agricultural sector, which makes up 25% of the economy and employs 60% of the workforce.

Asdhir himself pointed out that investors and advisors probably don’t want to base a portfolio around India, but he suggested a 5% to 15% stake, depending on risk tolerance might not be such a bad idea for investors seeking growth.

“We’re not saying you should put all of your money into India, that’s not the objective,” he says. “The objective is that, given the process that will take place in India, you should put a small percentage in India and tap into that growth.”

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Is India the next big thing? Discuss the merits and possible pitfalls of investing in India with your peers in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(06/07/04)

Steven Lamb