Investing in India
Quick, where's the LAST place you'd expect to meet three Ivy
League-educated fund managers from India?
Let's see... The Vatican? Afghanistan? I don't know... But I met
these three smart guys in a pretty unlikely place: on an island
off the coast of Belize called Ambergris Caye. I was impressed
with these fund managers from India. So much so that I must have
been asking them too many questions about investing in India
over dinner...
I asked them about how they analyze investment opportunities in
India, how they run their investment fund management business,
the Indian stock market and more. Usually, it only takes a few
questions for me to sniff out "average" fund managers. But these
guys were impressive.
So I kept going. (Too far, apparently... At a lull in the
conversation, one of their wives asked, "What, no 21st
question?")
I think that Rahul, the head analyst of their fund management
company, Atyant Capital, is on to something. He has a
competitive advantage... less competition.
You see, folks like you and me can't do foreign direct
investments into India. Since it's difficult for foreign
investors to invest there, most of us, frankly, don't bother
with investment opportunities in India. And from there Rahul
stretches his competitive advantage even farther... he
specializes in smaller stocks, which have even less research
competition than the big blue chip stocks.
How Investing in India Earns a 300% Return...in Less Than 3 Years
It's been working. Apparently, $1 million invested with Rahul in
2002 would be worth over $4 million today. Stocks have done
well... Even so, Rahul said stocks he follows that were trading
for 2-4 times earnings are now trading at 4-8 times earnings -
still cheap.
But Rahul's advantages are our disadvantages. I haven't
considered investing in India much, because as foreigners we
only have a small range of choices to invest in. That said, it
might be time to start looking at investment opportunities in
India. Here's why...
Investment Opportunities in India? A Few of Rahul's Big Points
and Considerations...
Quick - guess which two economies outside of the U.S. will be
the world's largest in 30 years' time? Most people would start
with China. And I'd venture to say that most people wouldn't
believe that India's economy might be larger than Japan's or
Germany's. But that's Goldman Sach's conclusion in its special
report, "Dreaming with BRICs."
Sounds crazy that India would be more important than Japan. But
it's easy to understand. Japan and Germany are stagnant growers
with older populations. And India is a fast grower starting from
a very low base, with a very young population, which will open
up considerable investment opportunities in India. By 2040,
China will be larger than the U.S. And by 2060, India may be
larger than the U.S. (extrapolating trends from the Goldman
Sach's report).
The demographics (India's young population) were one of Rahul's
big points. The difference between China and India is huge...
Rahul says 25% of people in the world under the age of 25 are in
India, and a full 80% of the population is under 45 years old.
That spells good news for investing in India in the future
because an old population becomes a major drag on economic
growth.
We are discovering that the hard way in the States with our
Social Security crisis--that there won't be enough working-age
people to pay Social Security for our retirees.
Looking down the road, China is in more trouble than America.
According to The Economist on March 3, 2005: "China is aging
faster than any other country in history. It is unique in
growing old before it has grown rich." Why? It's simple. By
introducing its "one-child" policy in 1980, China in essence cut
off the future number of young workers to support its aging
population. This creates an "instant" problem... that will
appear in a few decades.
Another of Rahul's points was that you haven't missed the gains
yet.
"There's Still Time to Profit from India Investments"
While Indian stocks have done well lately, they've basically
been in a trading range for the last dozen years (as long as
MSCI has been tracking Indian stock market data in U.S. dollar
terms). You're still able to buy today at not much above the
1994 highs.
For comparison, in the U.S. the Dow Jones Industrial average was
below 4,000 in 1994, and it's above 10,500 today.
So why have Indian stocks as a group not gone anywhere? It might
be because India has played second fiddle to China. The
Economist said it best on March 3 of this year: "If this is a
race, India has already been lapped."
But the time to buy stocks is when expectations are low, not
high. And while expectations are high in China, not nearly as
many folks have invested in India.
Unfortunately, as foreigners, our investing choices in India are
not cheap, at first glance.
I put together a list of the stocks that we can easily buy
below... the major Indian stocks that trade on the U.S. stock
exchanges. Of course, not being an expert in any of these, I'd
likely consider them only if they were trading at a forward P/E
of less than 10. None of these are even close:
*INF OSYS
* WIPRO
* ICICI BANK
* HDFC BANK
* SATYAM COMPUTER SERVICES
* TATA MOTORS
* MAHANAGAR TELEPHONE
* DR REDDY'S LABORATORIES
* VIDESH SANCHAR NIGAM
Our other alternatives are two India funds: The India Fund
(IFN), and the Morgan Stanley India Investment Fund (IIF).
Unfortunately, these two funds have a generous helping of the
relatively expensive stocks listed above in their portfolios.
India may surprise the world with its economic growth over the
next few decades, and those investing in India may be rewarded.
And China, with its high expectations, may disappoint.
The problem for you and me as foreigners is, investing in India
means our choices are limited to the blue chips above that
appear expensive at first glance.
If a stock market crash hits India in the next few years, then
it'll really be the time to buy, as the demographic story isn't
changing.