News Analysis date published New: 
Wednesday, October 19, 2011 - 13:00
New Date created: 
Wednesday, October 19, 2011 - 13:10
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Wednesday, October 19, 2011 - 13:00

5 Reasons Why You Should Invest in This Emerging Powerhouse

Wednesday, October 19, 2011 - 1:00pm

I'll bet you can name most of the world's top 10 economies. Most of them, such as the U.S. economy, the Japanese economy and the British economy have long been global powerhouses, yet their days of peak growth have likely passed. Only two of the top 10 economies have been growing at a 10% clip during the past decade. You might have guessed that one of them is China. The other one? Well, its home to the largest population in the world. It's also home to the world's largest middle class, assessed at 300 million people by the International Monetary Fund (IMF). Do you need another clue? Its stock market has fallen sharply since November.

I'm talking about India, where the local stock market is again in the midst of a deep swoon, which comes along every half decade or so. This snapshot of the India Fund (NYSE: IFN) tells the tale. The fund has stumbled for a series of reasons I'll note in a moment, but if you've got a long-term view, then these kinds of swoons are the ones you need to monitor when it comes to the emerging-market sector. These markets are extremely volatile, but thanks to tangible economic advances, most of them -- including India -- are making higher highs and higher lows.

Why the sell-off? Blame it on inflation and slowing growth. According to the most recently available data, inflation has surged to 9.8%, the highest in more than a year. And a quarterly snapshot of the economy shows it's slowing to 7%-8% growth from almost 10% growth in 2010.

The inflationary pressures should come as no surprise. While China has been rebuilding its dilapidated infrastructure, India's governmental efforts have lagged. So years of steady growth -- 14.4% annually in the past decade -- have created choke-points in the economy where the roads, bridges and rail lines simply can't keep up with the rising level of economic activity. That pushes up prices.

In response, India's elite are taking it on themselves to create infrastructure for their companies and industries. In 2010, for example, the private sector poured more money into the development of shipping ports than the government did. The good news: India's understanding of the problem is getting badly needed attention, so India's government has laid out a path for increased infrastructure investments that should finally help remove the bottlenecks. This should enable the economy to grow at a fast clip with fewer inflationary pressures.

Here are five statistical snapshots of how India is preparing for future growth:

1. India's savings rate stands at 35%. This means the typical Indian household has avoided the temptation to borrow heavily to buy cars, houses and other items and, as a result, consumer spending has proven to be steady even though the global economy has ebbed and waned. Looked at another way, India remains underbanked, with less than 2% of its citizens having access to credit. In places such as Brazil, a developing consumer-banking sector has paved the way for sustained growth in consumer spending. This trend is just getting going in India, according to recent reports from banks like ICICI Bank (NYSE: IBN) and HDFC Bank (NYSE: HDB).

2. Literacy has risen from 12% of the population 60 years ago to a recent 74%. This is still below the 84% global average, but the gap is narrowing. Higher literacy tends to produce higher output per worker.

3. Corruption in India is rampant. It ranked No. 122 in the world in a report from Reporters Without Borders. Corruption is corrosive, both on consumers and companies. The good news is India finally looks set to address the issue, recently issuing a series of steps aimed at boosting fines and jail times when perpetrators get caught. The moves come as high-profile protestor Anna Hazare -- and others -- had been waging hunger strikes in protest of endemic corruption. If the recently-enacted laws have real teeth, then business investment may spike in 2012 as the playing field becomes more level.

4. Improving business conditions along with less restrictive government policies are helping attract foreign capital. Foreign direct investment in India surged from $4 billion in 2003 to more than $35 billion in 2010. These investments take time to bear fruit, but the rising tide of capital inflows eventually find their way to the most productive areas of the economy such as infrastructure investments and global manufacturing facilities.

5. India's exports are surging, expected to increase roughly 15% to $280 billion in the fiscal year that ends March 2012. The big driver: other emerging markets. Exports to Africa and Latin America are on track to double in the current fiscal year.

Investing in India typically means choosing the right mutual fund, because the country's largest corporations tend to avoid U.S. listings through American Depositary receipts. Fund choices include:

  • PowerShares India (NYSE: PIN) -- this fund tracks the performance of India's Indus index.
  • WisdomTree India Earnings (NYSE: EPI)
  • The aforementioned India Fund. After rising, falling and then rising at least 60% in 2007, 2008 and 2009, Morningstar notes that "this is not a fund for the faint of heart, but long-term investors should expect strong returns." And long-term returns won't be eaten up by overpriced fund managers: The fund's 1.32% total expense ratio is "among the lowest of all Asian equity closed-end funds. We believe investors are paying a fair amount to gain access to the Indian equity market via this experienced team," add the Morningstar analysts.

Risks to Consider: This is a highly volatile market with loads of potential that could easily fall further in the near-term if growth slows or inflation fails to cool. Investing in India is most suitable for long-term investors.

Action to Take --> One of the defining factors of the current global stock market climate is that emerging markets are getting hit even harder than more mature economies. Yet it's the emerging markets -- like India -- that appear best-positioned to post strong long-term growth rates. With Indian stocks off 40% in the past 11 months, this looks like a great time to establish a position in one of the key India funds.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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