India has the potential to be the next great bull market of the 21st century – an opportunity of being a better investment than even China!
Like China, India was stuck with a failed economic system for over 50 years. It was a bureaucratic, socialistic state that led to weak growth, and stymied entrepreneurship and initiative. Famines, lack of investment, and poverty were the result.
But In the early 1990’s, the country changed course and started to open up its economy to the world. Personal marginal tax rates have fallen from 50% to less than 30%. Tariffs and import quotas were slashed, exports are growing at a 20% annual rate, with America being its largest market. Only 10% of its economy is dependent on international trade, insulating it somewhat from external shocks. The banking system is much improved, and non-performing loans have dropped to less than 4% of total bank loans. It has fiscal crisis to accumulating $135 billion in foreign exchange reserves.
Here are six reasons that investors should consider tilting some of their long-term capital towards India and not China.
Unlike China, India is a functioning democracy with respect for property rights and the rule of law. China’s authoritarian state may have the advantage at making quicker decisions and pushing through economic reforms but without democratic political reform it will eventually hit a speed bump the size of the Great China Wall. India’s multi-party parliamentary system with its obstructionist bureaucracy is far from ideal but at least the daily speed bumps on the road to market reform can be overcome.
India is a natural ally of the U.S. as it emerges on the global stage and plays classic balance of power politics. America’s relationship with China will at best be wary and tense. The fact that many Indian citizens speak English is also a significant advantage both commercially and politically.
China’s state-owned companies have staying power but government ownership will limit their growth and potential. Foreign governments will be suspicious of their intentions and likely consider them as an extension of the Chinese government. State ownership will also lead to inefficiencies and an inability to hold onto top management talent.
India’s capital markets are better than China’s. India’s stock market was established in 1870 and has 6,000 publicly-traded companies and a more modern financial and banking system that allocates capital fairly well. Only 10% of bank credit in China goes to private companies. India has 100 companies with a market cap over $1 billion.
India is a very youthful nation with 50% of its population under 25 years of age. This leads to less strain on its national budget and the hope that the younger generation will drag the bureaucracy and politicians to swifter implementation of market reforms. China’s one-child policy has backfired leading to an aging population which will lead to manpower shortages and tremendous pressure on its national budget. 20% of Shanghai residents are over 60 years old and by 2020, one-third of Shanghai’s population of 13.5 million will be over 60.
India has a more balanced and sustainable economy with 64% of its GDP attributable to consumer spending and 50% of its GDP from service sector. China’s economy is more dependent on foreign investment, exports and resources. India’s 250 million living in poverty is a tragedy but it’s middle class has quadrupled during the past two decades to reach 250 million as well.
For sure India has its challenges: big infrastructure needs, frustrating red tape and a tendency for the government to hang on to large state-owned enterprises to mention a few. It has recently suspended its privatization program, has high levels of public debt, very poor basic services such as elementary education, water and health, rigid labor laws, and still lacks the consensus that exists in China for welcoming foreign investment and placing a high priority on economic growth. India’s infrastructure such as roads, power and ports is also in desperate need for investment. This is one area that China is way ahead of India. The other is China’s ability to attract roughly ten times as much foreign direct investment.
India’s economy is doing well but is still below its potential. Just think if India embraced foreign investment, privatization, had the political will to improve the lives of workers in agriculture by consolidating farms and using more technology to vastly improve productivity. If it can provide its citizens with quality basic education and other services and put in place adequate power and other infrastructure, it can create 100 million new jobs in industry and manufacturing.
Still, compared to China, India does not get much attention except for the outsourcing issue and is – for now – largely under the radar screen of even sophisticated investors. After a strong start this year, India’s 30 company Bombay Sensitive Index (Sensex) index was beaten down more than 20% but has recovered to be flat for the year.
The challenge with investing in India right now is valuations of the leading companies and the limited investment options. Valuations may be getting a bit ahead of themselves with SENSEX companies trading at around 17-18 times next year’s earning projections versus 13 times for emerging markets as a whole.
The Morgan Stanley India Fund (IIF) is a closed-end fund that invests in India’s blue chips trading at $42, quite a bit off its 52-week high of $57. It is a bit pricey right now and trades at a 17 % premium to net asset value so caution is recommended until this premium comes down to the historical average in the low single digits. I would make only a modest allocation at this point. There are also some Indian ADRs trading on U.S. exchanges and these are also expensive and trade at a price premium over the India market price. My favorites are Dr. Reddy’s Laboratories (RDY), HDFC Bank (HDB) and Tata Motors (TTM).
Be patient - there no doubt will be great investment opportunities as well as new investment vehicles to take advantage of this great secular bull market. India presents investors with the opportunity of a lifetime and its democratic government, stronger financial system, market-based interest rates and history of respecting property and intellectual rights may make it a better long-term play than China.
Carl T. Delfeld President & Publisher Chartwell Partners http://www.chartwelladvisor.com/
Carl has over twenty years of experience in the global investment business with a strong background in Asia.
• Author of global investor primer "The New Global Investor"
• President of the global investment advisory firm Chartwell Partners
• Publisher of the Chartwell Advisor ETF Report and Asia-Pacific Growth
• Columnist on global investing with Forbes Asia: "Global Gambits"
• Former U.S. Representative to the Executive Board of Asian Development Bank
• Chairman of the global economic strategy think tank ChartwellAmerica
• Asian specialist with the U.S. Joint Economic Committee and the U.S. Treasury
• Former member of the U.S. Asia Pacific Economic Cooperation Committee
• Former investment executive with Robert Baird & Company and UBS
• Graduate of the Fletcher School of Law & Diplomacy with economics scholarship from U.S.-Japan Friendship Commission
• Exchange student at Sophia University, Japanese Ministry of Education Fellow at Keio University
