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The Economy of India
The Smart Profits Report: Issue #464
Friday, October 12, 2007
The Economy of India: GDP Growth Is Exploding And Stocks Are Surging… Is It Time To Bet On India?By Karim Rahemtulla
Investment Director, Mt. Vernon Research
At long last… After spending the last 29 hours on various planes and stuck inside airports, I finally made it to Mumbai, India last night.
Let me tell you… it’s hot here. And I’m not talking about the weather. The Bombay Stock Exchange hit a new all-time high today and is approaching the 19,000 level. That’s almost double where it was this time last year.
Great news, you say. Well, yes and no. Although the economy of india and its stock market are flourishing right now, the rapid growth is scaring many investors. And that’s why I’m here. I’m leading an investment research trip, taking in the country’s hotspots, examining its rapidly emerging market, meeting with several companies, and separating the wheat from the chaff when it comes to India’s lucrative investment potential.
Here’s the scoop…
India’s Economy: Dynamic And Energetic… But In Need Of Some Upgrades
India is a dynamic country. The place is teeming with life and energy. Foreign funds are pumping money into India’s economy at a record pace and stocks keep rising. There is almost certainly an economic miracle happening here.
But the country is also exploding at the seams. The roads are a mess. The power grid is a mess. Everything is a mess.
I noticed it as soon as I set off for my hotel, the Taj Mahal Hotel in Mumbai, where I am writing this column to you now. It’s a fabulous place, but despite being just 15 miles away, as the crow flies, it took an hour-and-a-half to get there. My crow needs to find a new route!
The thing is, city officials have talked about finding a new route to the airport for ages. They’ve talked about a bridge over the bay. Some say this will be an 8-lane monster, making the journey just 20 minutes. I say: “You said the same thing 25 years ago. I don’t care if it’s 8 lanes or 12 lanes… for heaven’s sake, just build it!”
So what’s happening elsewhere?
Keeping The Dream Alive, But The People Are Just So Darn Productive!
India’s equivalent of the “American Dream” is still alive and well… and you can make money here. But a critical factor is often left out of the equation. Contrary to the investment public’s opinion, the poor in India are still poor. And they will stay poor for a while to come. Making money is tough for those folks.
The middle class may also be in for a rude awakening. Turns out India has hopped on the productivity bandwagon. My good friend and Quantum Fund manager Ajit Dayal tells me that productivity has increased five-fold over the past decade. While that helps to keep economic expansion motoring along for now, it’s not a good sign for a country that needs to create more jobs in order to boost overall wealth and continued growth.
Young, Emerging And Illiquid: Beware India’s Economic Liquidity Trap
On our first day here, we wasted no time in getting down to business. In presentations made to our group of investors, one of the most interesting observations is one that you often see in young, emerging markets or stocks, and it holds true for India: It is an economically illiquid market.
For example, Ajit will only look at companies that trade at least $1 million in share value per day for a year ($1 million, not 1 million shares), otherwise he considers them a liquidity trap. Out of the 7,000 stocks that trade on the Bombay exchange, you wouldn’t think that would be much problem. But you might be surprised. Guess how many fit his criteria?
Just 284.
Yes, there is money to be made from India. And we’ll be making our bets. But with odds as low as that, we won’t be taking chances until our odds improve. The market just can’t handle it right now. On the next correction, we’ll be buying, but not at these levels.
Stay tuned. I’ll report back soon, with the best sectors in India at the moment.
Karim Rahemtulla
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Today’s Smart Profits Action Center
- Following 9.1% first-quarter GDP growth, India’s economy blazed to a 9.3% second-quarter gain. The vital manufacturing sector led the way, with an 11.9% increase in output versus a year earlier. Construction grew 10.7%, while farm production rose 3.8%. Not surprisingly, the Bombay Stock Exchange has reacted positively, surging from 13,827 at the start of 2007 to 18,814 today - a 36% jump. Over the past three months alone, it’s up 25%. And because India’s economy is based more on domestic consumption and investments, rather than exports like many of its other Asian neighbors, it’s handling the fallout from the U.S. subprime meltdown much better.
- India’s strong growth is filtering to its citizens. The ranks of the middle class have tripled to 300 million over the past two decades. However, the central bank has raised interest rates three times this year in order to squash inflation.
- When it comes to timing the peaks and valleys of emerging markets, few people know the game better than Karim Rahemtulla. In the July Xcelerated Profits Report issue, he spotted China’s stock market becoming top-heavy and alerted investors to “the ultimate contrarian play” (if you read Marc Lichtenfeld’s column on Tuesday this week, you’ll know how effective a contrarian investment strategy can be). Just seven weeks later, as the Chinese market tumbled along with the U.S. markets, the sell alert went out and readers pocketed profits between 47% and 112%. To find out how you can cash in on Karim’s recommendations, plus those from the other professional traders at the Xcelerated Profits Report, click here.
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- Emerging Markets: Two Plays In India… With Caution
- The Global Economy: U.S. Sub-Prime Mortgage Meltdown Effecting World Markets
- Global Markets Investing: Get 300% More Bang For Your Investment Dollar And Diversify Your Portfolio
