Some very smart people -- including billionaire investor Wilbur Ross -- are buying Indian equities right now. Here's why you should consider doing the same.
1. India is unlike other emerging markets
As I've written before, not all emerging markets are created equal.
Many people erroneously lump the BRIC countries -- Brazil, Russia, India, and China -- into a single group. But those countries all have huge cultural and economic differences. The only thing that unites them is their growth potential. In particular, India's economy is quite different from other emerging economies in some fundamental ways -- and it has one crucial advantage.
2. India doesn't rely on exports.
Shattered Western economies have done more than cause pain to their own citizens. Their struggles have also caused global trade to contract rapidly, leaving many Asian economies -- which have long pegged their fortunes on exports -- to struggle.
Among export-driven Asian economies, Singapore saw its first-quarter GDP shrink at a shocking 19.7% annualized rate. When a country runs a large trade surplus, its economy may appear good on paper. But when their main trading partners experience a sharp collapse in consumption, export-driven economies shrink. Dramatically.
But take a look at how Asian countries stack up in terms of export-to-GDP ratios:
|
Country |
2008 Export-to-GDP Ratio |
|---|---|
|
Hong Kong (including reexports) |
163% |
|
Singapore (domestic exports) |
96% |
|
Malaysia |
90% |
|
Thailand |
65% |
|
Taiwan |
62% |
|
Korea |
49% |
|
China |
33% |
|
Indonesia |
30% |
|
Philippines |
30% |
|
India |
15% |
Source: CLSA.
Notice how low India's ratio is, compared to the rest of the region? That should help insulate India from lagging global trade.
3. India's relatively cheap
Back in mid-February, I wrote that India was the least risky of emerging economies. Since hitting a bottom in early March, the Bombay Stock Exchange Sensitive Index, or Sensex, has been the best-performing of any BRIC country.
When the Sensex bottomed out in March, the exchange traded at 9.2 times earnings, the lowest since 1996. Even after its recent rally, its P/E ratio is still near five-year lows. But you shouldn't feel like you have missed the boat.
Shrinking earnings
Unfortunately, even with expected economic growth in the neighborhood of 5%, Morgan Stanley estimates that earnings at Indian companies will decline 16% in 2009, compared with a 25% decline for emerging markets as a whole. On a relative basis, India is doing well, hence the big rally. Plus, the drop in valuations was so severe that most of the falling earnings have already been reflected in current stock prices.
Both Brazil and China trade at significantly higher P/Es. And while the Russian market is cheaper on a P/E basis, there are political factors there that weigh on the market.
Stock ideas
I still like Motley Fool Global Gains recommendation HDFC Bank
One stock I have not mentioned previously is Infosys
Infosys is forecasting its first-ever dollar revenue decline, projecting a fall of between 3% and 7%. And while a weak Indian rupee has meant that earnings measured in rupees have risen, U.S. investors have seen their ADRs lose value in dollar terms. But given that Infosys' growth has been driven by its ability to decrease costs for its customers via its outsourcing strategy, growth should resume once this storm passes.
Two other beaten-down Indian names worth your consideration are Wipro
Finally, if you prefer a diversified fund approach, I like the Matthews India (MINDX) fund. The fund has a reasonable expense ratio of 1.29% and owns a mix of mostly large and mid-cap stocks. The fund was hard-hit in 2008 (along with nearly every other equity fund), but the Matthews fund shop is well-regarded. So if you're looking for broader exposure to India, I'd put it near the top of your shopping list.
India remains the major emerging market least exposed to the collapse in global trade. Though it's rallied a bit lately, it still looks strong for the future.
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