If there was one lesson for international investors in last year's meltdown, it's this: Foreign capital can flee emerging and developing markets even more quickly than it comes in.
It didn't matter that markets like Brazil, Chile, China, and India had better growth prospects and were less leveraged than developed markets. Maybe it was safety in numbers or just out of habit, but when it became clear that the housing bubble was morphing into something worse than your average recession, investors fled Petrobras (NYSE: PBR ) , Sina (Nasdaq: SINA ) , and other emerging market darlings for the safety of cash and government bonds in developed markets.
The party is on again
Now that the panic has passed, investors have gone back to the old playbook. Avoiding U.S.-focused companies and limiting dollar exposure are the hot momentum trades, while buying into the higher growth rates and healthier economies overseas are back in style. The examples of capital flooding into these markets are everywhere. The iShares MSCI Emerging Markets Index (NYSE: EEM ) is at a 52-week high, Brazil recently put a 2% tax on foreign purchases of debt and equity in place to slow down the torrent of money pouring in, and India reported that foreign funds have invested $15 billion in its markets this year. This goes a long way to explaining why Tata Motors (NYSE: TTM ) and ICICI Bank (NYSE: IBN ) have quadrupled off of their March lows.
India's coming IPOs
With capital flowing freely and a government in place that wants to increase competition in its transportation and energy markets in power, India is getting ready to restart the privatization of its state-owned companies -- also known as public sector undertakings or PSUs. According to a recent Bloomberg article, the government has $144 billion in potential shares it could sell, and it's looking to start by selling $5.5 billion worth.
India's choice of gradual privatization is similar to the method the U.K. used when it privatized BP (NYSE: BP ) and BT Group (NYSE: BT ) in the 70s and 80s, and it should serve it well. Stocks listed on exchanges in India have a combined market cap of well over $1 trillion, so assuming capital continues to flow in the market, $5.5 billion in new supply shouldn't be a problem. The same holds true for future sales -- if they are measured, investors are likely to gobble them up.
Much more good in the long term
In the short-term the government gets additional funds that it can use for infrastructure, education, and other investments, but the long-term benefits for India and its markets are substantial. Instead of bureaucratic and inefficient transportation, mining, and energy firms, India should enjoy the benefits of more streamlined and profitable enterprises. For example, when the U.K. first started privatizing BT Group, there was a waiting list for phone service and outages. Within a few years, the waiting list was gone, and the cost of phone service had decreased. And although the new supply might initially weigh on India's market, the new listings will make its markets deeper, more liquid, and more transparent -- all big pluses for investors.
Seeking the best ideas
It's impossible to know how quickly India's government will press ahead with its sales, or if panicky investors will force the country put privatization plans on hold again. But we can watch how quickly it privatizes the PSUs and continues to pursue the reforms needed to allow greater foreign investment and more competition in its industries. With a young population and a number of private companies that have already grown into strong companies that can compete globally, it's clear the opportunities in India are substantial. That's why our Global Gains research team is traveling to India in early December to meet with companies, economic experts, and get the lay of the land.
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Nathan Parmelee does not own shares of any company mentioned. Sina is a Motley Fool Stock Advisor recommendation. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.