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Emerging Markets of India
The Smart Profits Report: Issue #287
Wednesday, March 1, 2006
Emerging Markets - Two Plays In India… With Caution
By Karim Rahemtulla
Chairman, Mt. Vernon Research
The Sensex (the benchmark index of the Bombay Stock Exchange in India) is up more than 80% over the past two years. India’s “economy,” it’s been said, is roaring. Recently, I traveled to the country to see firsthand just how big its economy’s blaze really is…
My colleagues at the Daily Reckoning sent me a message the other day from one of its readers. The reader questioned their wisdom of “sending” me to India, since I never had anything good to say about the country.
In fact, the last time I was in India, in 1997, the Asian currency crisis had barely begun. And after a three-week tour of the country, I concluded that I would not invest a dime there. Here’s why…
One Billion Reasons To Be Bullish?
When I returned to the States, I attended a major investment conference where I shared my skeptical view. The next speaker was less wary. As an emerging market specialist, he was bullish on India. How could you go wrong with a country that boasted a billion people? he said.
After his speech, we talked and he scoffed at my skepticism about the country - the lack of infrastructure, the grinding poverty, widespread corruption, the continued negative imprint of the caste system and lackluster leadership. India would be the next powerhouse of Asia, he claimed. I was confused. Not about whether I would invest in India, but rather, what he had seen there that made him so positive.
He mentioned the strong monetary inflows, including mutual funds, and the move in stock prices. At the time, the Indian stock market had half the market capitalization of Microsoft.
I asked him about what he made of life on the street. He paused, and then said he had actually never been to India!
On my recent trip there, I saw improvement. The top 10% of wage earners are now enjoying a standard of living comparable to the United States in the 1950s. Two-wage-earner families have become commonplace. The introduction of credit has blossomed, as has the greater supply of Western goods. In a sense, India is undergoing a renaissance. Just take a look at “Silicon Valley” in Bangalore and you’ll be amazed at the sprouting number of nightclubs and Western coffee shops.
Two Promising Plays in India
I do like a couple of sectors; namely, infrastructure and air transportation.
The country will spend billions in the coming years on roads and air transportation. And Indians love to travel. The airport in Delhi, a city inhabited by 15 million (of which about 2 million can afford to travel by plane) has a terminal building and infrastructure more appropriate for a city the size of Albany. Mumbai is not much better. Planes are packed and delays are common. Competition is beginning to heat up.
But even if you want to invest in these sectors, guess what? As a foreigner, you are limited to investing in India in a mutual fund or one of the 11 ADRs listed in New York. You could invest in the local market, but only through a proxy. So, for all intents and purposes, unless you want to invest in the IT sector, you are shut out.
India is still an enigma. It has huge potential but it is still stuck in the past. The vast majority of the population cannot live on less than $100 per month, and continue to live without access to purified water, health care or decent housing. So, if you are willing to bet on a country in which only 10% of the people are going to work for your investment, then look to India for growth.
Here’s what’s changed in a decade: About 100 million people have credit cards. Disposable income is up. The chance of having a “Western” lifestyle has improved.
But here’s the bad news: More than 1 billion people are still dependent on the services of a broken welfare system. When that shows signs of true reform, I will be the first to jump on the investment train.
Good Trading,
Karim
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Today’s Smart Profits Cribsheet
- For a discussion of another emerging market, please see Smart Profits #269, Emerging Markets: Forget the Great Wall - Let’s Go Shopping.
- If you’re like me, and the investment risk in India appears to be a bit too high for now, check out Smart Profits #275 to see what types of investments are worth looking into… especially in 2006 - Using LEAPS: These Options Are Set to Run Full Tilt
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- Option Trading Strategies - Option Plays That “Earn” Their Keep
