As global markets come back from their depths, one country that's looking up is India. Just look to Indian ADRs like Tata Motors
Anh Lu, portfolio manager for T. Rowe Price's New Asia Fund
Jennifer Schonberger: What is the state of the Indian economy right now?
Anh Lu: Fairly healthy, like most Asian economies. Most Asian economies, including India, weathered this crisis very well because ultimately the Asian economies did not have a debt problem. The impact was really only two or three quarters max, and that was mostly because the credit markets and the capital markets nearly froze, which hurt businesses. But as soon as credit came back to the system, businesses and the economy came back very quickly. So you're seeing a very quick recovery in growth again.
Schonberger: What is your outlook for GDP next year?
Lu: I'm not a forecaster, but I expect GDP to come out at 6% to 7%, which is fairly low versus what India has been growing at for the last two or three years. Since 2004 it's been growing on average anywhere between 8% to 9%. …
… I think India is still a very young economy and there's still a lot of investment-related spending to be had. As long as capital is available and as long as the government is allowing infrastructure to be built, it can grow sustainably at 7% or 8% for a long time.
Schonberger: What trends are you seeing in India now? Which sectors will drive the most growth for the Indian economy over the next five to 10 years?
Lu: India is not very different from the rest of Asia. We really like domestic-consumption companies because consumption levels in Asia are still very low, especially versus disposable income and savings levels.
In India, more specifically, we really like the auto sector because penetration rates are still very low. A lot of Indians actually don't buy cars because the roads aren't good enough to support four-wheelers. Many still drive two-wheelers. But as the road infrastructure improves and as urbanization keeps growing, the penetration rate of automobiles will continue to grow. India probably has one of the lowest penetration rates in terms of autos per household in the world.
We also like more investment-related growth, which is more special to India. So, for example, infrastructure is a huge problem in India. There's a huge lack of it. For the next decade, I think the buildout of infrastructure will be a major trend for investors. So power companies [and] companies that build ports, roads, or any type of infrastructure -- whether they build it, own it, operate it, or provide equipment for it -- we generally like those types of businesses as well.
Schonberger: One of the advantages Indians believe they have over China is that they're a democracy. But the fact that it's a democracy also means that the country is not as efficient as China. Does it help or hurt India that it's a democracy?
Lu: I think over the long term a democracy is good. But to be honest, if you talk to most investors in India, the running joke is that the government is usually a deterrent. The bureaucracy is still very heavy, and the state-owned factors and the government are still run in an inefficient manner. That needs to go through a restructuring process, and I think that will happen as they privatize the state-owned entities, but it will take time.
When China decides to do this, as we saw in the '90s, it does it in a big sweep, because it's not a democratic government. In some ways, that makes it more efficient. I think India will get there, but it will get there in a slower manner. Indian businesses have functioned under this for decades, so they know how to work around it.
Schonberger: India recently elected a new party into power this spring. Will this new government be instrumental in privatizing and moving the country toward an environment that is more benign for business at a faster pace than we've seen in the past?
Lu: Obviously, that's the hope for the market. It's the first time you have the kind of majority where, if the leaders want big change, they have a higher chance of pushing it through than any time in the last decade. Now, in India, things move at a very slow pace. So I would not expect dramatic changes. I say they would push reforms generally in the right direction, but it's not going to move at the pace that some people in the market are hoping. We're six months into that election and there have been no major changes yet.
Schonberger: What are the biggest challenges India faces now?
Lu: Infrastructure. It limits growth. I think India can be a very high-growth economy, but it's constrained by the supply, and the supply is mainly infrastructure. So that will constrain their growth unless they can get the roads built. There's a huge shortage of power, and the cost of power is very high. That makes a lot of industries, like manufacturing, noncompetitive. But I think the manufacturing sector in India has the potential to compete, because there is a lot of low-cost labor plus a lot of engineering talent.
Schonberger: Do you think that's one of the reasons why India has remained such a domestically focused economy?
Lu: Yes. India has had to work around that [exports] because it doesn't need to rely on ports and roads and railroads to transport the goods. So it goes to other areas to try to become globally relevant. But there is definitely the opportunity for India to become exporters of manufacturing and industrial types of products because the talent is there, but the infrastructure needs improvement. So in a way it kind of inhibits growth a little bit.
I believe that economies should have a mix. I think the services component can only go so far. So I don't think it's healthy for an economy at this stage to not have a well-rounded mix. China has the opposite problem. So both need to move to a better mix to become more diversified economies.
Schonberger: What's your outlook for the Indian stock market? With the Indian market having doubled this year, where (if anywhere) are you finding value?
Lu: We're still very optimistic on India over the longer term. In the shorter term, if things like inflation become a problem next year, then that will be a bit of a drag on the market. But India has been through double-digit inflation many times and the economy has always come out OK. So we're not looking for catastrophic results. But it might be just a drag in the shorter term.
It's hard to find apparent value the way we saw earlier this year. But when you look at the growth these companies can achieve over the next three to five years, we still find stocks where we can still justify the valuation, [though] I wouldn't say it's cheap.
If you're a classic value investor and you're trying to buy stocks at 10 times price-to-earnings, you won't find that in India. What you will find is a stock that is trading at 20 times price-to-earnings, but the company can grow its earnings on a three-to-five year compounded annual basis of 25%. That can justify paying 20 times earnings for that stock.
The only area where I can find value in the classic sense is if you go down into the small caps.
Schonberger: What's the best way for U.S. investors who probably don't have direct access to the local Indian market to gain exposure to India -- individual companies? ETFs? Mutual funds?
Lu: There are some ADRs selectively, like HDFC Bank
Infosys is the blue chip of outsourcing. So we always favor Infosys.
Schonberger: Given a 10-year time horizon, should investors be buying India or China today?
Lu: Both. India is probably 10 to 15 years behind China in terms of growth, investment, and demographics. So in that respect, India will probably have this high-growth trajectory longer. China is still going to be a high-growth economy, but this hypergrowth phase is going to slow down and China will get to that point earlier than India. But I would say both economies have a lot of interesting growth and companies to invest in for the next 10 years.
Interested in investment opportunities in India? Our Global Gains research team is traveling there at the end of the month to meet with the country's top companies and investors. You can get all of their special dispatches from the field delivered right to your inbox free of charge -- just click here to sign up.
Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. HDFC Bank is a Motley Fool Global Gains recommendation. The Motley Fool has a disclosure policy.
