Feb. 17, 2004 — India, long ignored by Western investors and overshadowed in recent years by the burgeoning economy of China, may have finally established itself as an attractive and profitable place to purchase stocks. As emerging markets surged in 2003, the number one international stock fund for the year was Eaton Vance Greater India Fund (ETGIX), skyrocketing 117.3%, versus 59.4% for the average emerging single-country fund.
As a potential target for American investors, India boasts a number of positive characteristics: attractive stock valuations, an increasing standard of living, rising industrial output, falling inflation, political stability, a well-developed banking system, improved corporate governance, robust capital markets, a strengthening rupee, and a huge, well-educated workforce.
As for the Indian market, the SENSEX, which comprises a broad array of 30 large stocks trading on the Bombay Stock Exchange, soared 73% in calendar 2003. According to the Times of India, foreign institutional investors poured in more than $7 billion into Indian stocks last year. This figure is expected to balloon to more than $20 billion in 2004.
Recent outperformance, and a positive flow of news, has seemingly made India the “flavor of the month,” said Ajit Dayal, deputy chief investment officer of Hansberger Global Investors and lead manager of the $1.8-billion Vanguard International Value Fund (VTRIX). “However, India is an attractive long-term growth story. Increasing consumption and demand for goods and services, and the need to add capacity across a diverse range of industries, provides stock pickers with a great menu of stocks to choose from.”
Todd Henry, a portfolio specialist at T.Rowe Price, noted that despite its surging returns, the Bombay Exchange still has an average 12-month trailing p/e of 19, and a 12-month forward p/e of only 15. “While stocks aren’t exactly cheap anymore, strong foreign buying may keep stocks moving in an upward trend over the short term,” he said.
After struggling through decades of modest 2% annual growth rates, India’s annual GDP has risen to the 6% level in the past ten years, driven by the government’s liberalization of the economy, loosening of controls, and recognition that foreign investments were crucial to development. The GDP is expected to grow 8% in fiscal 2004, and settle in at 7% the following year, Dayal stated.
However, typical of any emerging market, it should be stressed that risks remains high. Relative to its Western counterparts, Indian markets are small, illiquid, and not as well regulated. India, the second most populous nation on the planet, represents only a 6% weighting in the MSCI Emerging Market Free Index, and a minuscule 0.6% of the MSCI World Index.
To illustrate the embryonic nature of the Indian economy, consider that of more than 7,000 publicly-listed Indian stocks, about 6,000 have a market cap below $10 million. As a result, the vast majority of Indian equities barely qualify as microcaps, hardly the type of stock foreign investors want to buy. Local investors typically invest in the BSE-200 Index, which comprises 200 of the largest firms trading on the Bombay Exchange. Henry estimates there are 55 Indian stocks with market caps of at least $500 million.
Moreover, India has allowed foreign stock investments only since July, 1991, and foreign individuals still cannot invest there directly. Indian regulators developed a registration process for so-called Foreign Institutional Investors (FIIs) with its own strict rules and limitations. Of course, individual American investors may buy a limited number of Indian ADRs which trade on the NYSE or NASDAQ, including software firm Infosys Technologies ADS (INFY), which has benefited tremendously from outsourcing contracts from Western companies, and ICICI Bank ADS (IBN), India’s second-largest bank.