If you think the U.S. market has had a torrid run this year, take a look at India. That country’s equity market has doubled since March, with ADRs like Dr. Reddy's Laboratories
But as Warren Buffett would say, put next year away. If you're going to invest in India, you should be investing for the long-term story: the growth of an emerging market into a developed one. Investing in India for the long haul -- the next 10 years or more -- is increasingly attractive now, considering the country's domestically driven economy, focus on the software industry, democratic government, and years of growth on the horizon.
Pinakin Patel, client portfolio manager for Far East equities at J.P. Morgan Asset Management, a unit of JPMorgan Chase
Patel expects India’s GDP to grow 6.5% to 7% in its next fiscal year (which ends in March). This is on par with the historical average GDP growth of 7%. Patel projects India's long-term sustainable growth rate to be 7%. He says India still has another 20 to 40 years before becoming a mature economy. What's more, Patel says he thinks India will move along the growth curve at a faster pace than has historically been seen in underdeveloped countries, thanks to its positive demographics, a positive urbanization story, the strong position of the consumer, the corporate climate, and the government.
Generating growth internally
Besides torrid growth, the Indian economy is also notable for is its focus on software/IT services and for the fact that the majority of the country's growth is domestically driven. According to Patel, India exports less than 8% of its GDP. The remainder of India's GDP is generated through fixed investments and consumption.
Additionally, the Indian economy's focus on the software services industry (as opposed to the hardware industry) has served the country well, enabling India to weather the downturn better than other economies that focus on hardware. "If you look at the development of India, which was very dominant in software, and compare that with the likes of Taiwan, which was clearly very dominant in the hardware side, it's the likes of Taiwan that have suffered more in this downturn," Patel said.
New government benign for business
The long-term future of India is positive on the political front, which has good implications for corporate India. This spring, Indians elected a strong coalition government, which will preside for the next five years.
Indian corporations are now in a position to project their investment plans forward, because they know there is a stable political policy in place, one that won’t change with a new regime. As a result, Patel says we should expect to see greater investment by corporations within themselves, as well as the Indian economy.
"The government is in a better position to bring about further investment in infrastructure because they have a mandate to push India forward from a growth perspective," Patel said. "Given that the newly elected government will remain in power for another five years without any question marks over to their ability to rule, [this] makes it very positive for corporations, as well as foreign direct investment."
Where to invest
Patel favors the financial sector most, specifically banking stocks. He says the health of the Indian banks is extremely strong and expects a lot of organic growth going forward. The mortgage industry in particular attracts Patel, and it is one of the largest of his fund's top 10 holdings. He is overweight financials in his portfolio.
Patel is also positive on IT, but remains focused on investing in quality companies with good earnings growth. The fund manager also favors selective consumer discretionary stocks, including Indian auto stocks, agriculture-related stocks, and manufacturers.
In contrast, he is substantially underweight in the telecom sector because of a price war that recently erupted between the major mobile providers in the local market, squeezing margins.
Patel's favorite companies that trade on U.S. exchanges include Infosys Technologies
Challenges
As with every investing story, however, there are some pitfalls. Right now, the biggest constraint on India's growth continues to be its infrastructure. "Infrastructure is both India's biggest opportunity and biggest threat," Patel said.
The client portfolio manager says India's fiscal deficit poses a large constraint as well. Patel points to the fact that India has been effectively subsidizing oil at high rates, and that tax collections remain low relative to other countries. He also says geopolitics cannot be ruled out with China and Pakistan bordering India. "Given what's happening in Pakistan right now, and given that both Pakistan and India are nuclear powers ... I think it's important to be aware of that risk," Patel said.
When it comes to emerging economies like India, it’s important for investors to balance the unique risks against the very real potential for high long-term growth -- and invest accordingly.
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 former Global Gains recommendation. The Motley Fool has a disclosure policy.
