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Asia's New Investment Jewel
By Carl Delfeld
China is in its Glory, now Look to the Future.
Let's discuss an Asian country that could present us with the next great bull market of the 21st century – an opportunity that has the potential of being a better investment than even China!
Like China, this country was stuck with a failed economic system for over 50 years. It was a bureaucratic, socialistic state that led to weak growth, and stymied entrepreneurship and initiative. Famines, lack of investment, and poverty were the result.
But In the early 1990's, the country changed course and started to open up its economy to the world. The country's personal marginal tax rates have fallen from 50% to less than 30%. Tariffs and import quotas have been slashed, exports are growing at a 20% annual rate, with America being its largest market. Only 10% of its economy is dependent on international trade, insulating it somewhat from external shocks. The banking system is much improved, and non-performing loans have dropped to less than 4% of total bank loans. It has quickly gone from a balance of payments deficit to accumulating $135 billion in foreign exchange reserves.
Unlike China, it is a functioning democracy with respect for property rights and the rule of law. Many of its citizens have English as their native language. It also has more advanced financial markets than China, and a stock market established in 1870 that has 6,000 publicly-traded companies.
All the Right Demographics and Macro Trends
It is a very youthful nation with 80% of its population under 45 and - this is amazing - 25% of all people 25 and under in the world live in this one country! Its Citizens are thrifty with money to spend with a 28% savings rate to support capital investment. Consumer finance is rapidly becoming available and fueling more consumption and retail sales totaled $180 billion last year.
Economic growth is already impressive with 8.2% last year and 7% projected for 2005. Per capita GDP adjusted for prices is higher than China and its GDP growth rate has averaged 6% during the past 10 years. Fifty percent of its output comes from services and it has world class IT, media advertising, entertainment and pharmaceutical expertise.
The country's space program has launched 12 consecutive rockets without incident and it put the world's first graphic mapping satellite into orbit earlier this year. It has become a close ally of the United States recently signing a defense pact and placing a huge order with Boeing while considering purchasing advanced F-16 and F-18 fighters. President Bush, not a big traveler, is planning to underscore the importance of strong bi-lateral ties by visiting this country by the end of this year.
The World's Most Populous Democracy
You have probably guessed by now that the country we are discussing is India - the world's largest democracy.
For sure India has its challenges: big infrastructure needs, frustrating red tape and a tendency for the government to hang on to large state-owned enterprises to mention a few. Still, compared to China, India does not get much attention except for the outsourcing issue and is – for now – largely under the radar screen of even many sophisticated investors. India's 30 company Bombay Sensitive Index (Sensex) index is up 22% this year and broke the 8,000 barrier just last week. Much of the buying is being done by foreign institutional investors from the U.S., and more recently, Japan.
The challenge with investing in India right now is valuations of the leading companies and the limited investment options. Valuations may be getting a bit ahead of themselves with Sensex companies trading at around 14-16 times next year's earning projections versus 11 times for emerging markets as a whole.
The Morgan Stanley India Fund (IIF) is a closed-end fund that invests in India's blue chips and is up 97% in the last 12 months and 39% so far this year. It is a bit pricey right now and trades at a 14% premium to net asset value so caution is recommended until this premium comes down to the historical average in the low single digits. There are only eleven Indian ADRs trading on U.S. exchanges and these are also expensive and trade at a price premium over the India market price. One exception may be Tata Motors (TTM) which is listed on the NYSE at a price of $11.50, has a dividend yield of 4% and trades around 13 times 2006 consensus earnings estimates.
How to Play the Opportunity
Information is available to help you navigate investing in the Asia-Pacific region. Unfortunately, many of us rely on the newspaper and evening news. There are sources, like the "Asia Investor Intelligence," that give much more educated and specific advice.
So, where to act right now? For the right investors, there are long-short funds that focus more on India's small and mid-sized companies which tend to be much better values, have not participated in the recent run up of prices and are also more insulated from global capital flows. These funds can also hedge against companies with unsustainable valuations and cushion inevitable pullbacks in the market. Be patient - there no doubt will be great investment opportunities as well as new investment vehicles to take advantage of this great secular bull market.
India presents investors with the opportunity of a lifetime and its democratic government, stronger financial system, market-based interest rates and history of respecting property and intellectual rights may make it a better long-term play than China.
About the Author
Carl Delfeld is head of the global advisory firm Chartwell Partners. He served on the Executive Board of Directors of the Asian Development Bank in Manila and is the author of "The New Global Investor". For more information go to http://www.chartwelladvisor.com/asiaintelligence.htm or call 877-221-1496
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