India: A Brave New Emerging Market

Another pitfall with Indian investing lies in the somewhat chaotic and archaic nature of Indian stock markets. Dayal points out that in the early days of foreign investing in India — roughly 1992-1994 — only paper share certificates were available to investors, a cumbersome and tedious record-keeping system with great latitude for mistakes and corruption. “Trades could take 12 months to settle in those days,” he noted. “However, the system has dramatically improved since. A new electronic trading system, The National Stock Exchange was established because brokers in Bombay Exchange resisted change, presumably to maintain high spreads between the bid and offer prices.” Though settlement times have been reduced now to three days, India has done a poor job in promoting and marketing its newly advanced trading system, adds Dayal.

The good news in India is that its equity markets are growing. For example, the country’s IPO activity, valued at about $1 billion in 2003, is expected to increase sixfold this year. Dayal believes the majority of these new stocks will be in oil, telecom and software. Indeed, planned public offerings by the government of shares of two state-owned giant oil and gas companies are expected to generate $2.5 billion by March. Consequently, more Indian stocks in float would likely raise the country’s weight in the MSCI indices, as well the nation’s global profile.

While it is tempting to compare India with its giant neighbor, China, the differences between these economies and cultures are dramatic and profound. For one thing, as exemplified by its proliferation of small upstart companies, India possesses a huge number of entrepreneurs. By contrast, almost every company in China is either state-owned or state-sponsored. In essence, the Communist government is itself that nation’s principal ‘entrepreneur.’ Only recently has Beijing introduced the profit motive into its corporate entities.

Henry noted, however, that India’s market movements are very similar to that of China. “Indian stocks perform well whenever there is euphoria about China,” he said. “Western investors view both nations as global economic giants with similarly tremendous potential. Both countries are receiving massive outsourcing contracts from Western companies, although, with China, it’s primarily in manufacturing, while India is getting services and software contracts.”

Fund Advisor identified only one open-ended, U.S.-based mutual fund investing exclusively in India, Eaton Vance Greater India/A (ETGIX), managed by Hong Kong-based Zaheer Sitabkhan. As of Dec. 31, 2003, the $53-million portfolio had 43 holdings. Reflecting the “old economy” nature of India’s business landscape, the fund is dominated by engineering/manufacturing, chemicals and metals companies. The fund’s average $2.89 billion market cap gives the portfolio a decidedly small-cap complexion.

For the three years ended 2003, the fund gained an average annualized 16.9%, versus 13.8% for the average emerging single-country portfolio. The fund features an expense ratio of 4.75%, more than double that of the peer group average (2.27%); and a turnover rate, 112%, a bit higher than the peer group (102%). The fund’s standard deviation of 28.6 is greater than the peer group average (25.8), making it even more volatile than the average single-country fund, and giving it a higher risk profile.

The $41-million Eaton Vance Asian Small Companies Fund (EVASX), also managed by Sitabkhan, has about 30% of it assets exposed to India. The portfolio soared 85.3% in 2003. As of Dec. 31, 2003, the fund had 87 holdings. Half of the portfolio is taken up by industrial, financial and consumer discretionary stocks. The fund has a 2.47% expense ratio, versus 1.96% for the peer group, and a turnover rate 112%, versus 146% for its peers. As of the end of December, the fund had 11.7% of its assets in Hong Kong, 6.5% in Korea, 5.7% in Taiwan, and 5% in China.

–Palash R. Ghosh