India: Profiting from Asia's New Investment Tiger

12/01/2007 12:00 am EST

Focus: GLOBAL

Tom Lydon

Editor and Publisher, ETF Trends

Moderator, Tom Lydon, president of Global Trends Investments and his panel of global experts told attendees of the opportunities as well as the risks in the still-hot Indian market.

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Lydon noted that there are several potential problems facing the Indian economy and markets, including inflation on wages and food prices, the high level of illiteracy, infrastructure that is severely lagging growth requirements, large budget deficits, and rigid labor laws.

But withstanding those challenges, Lydon remarked that Gross Domestic Product (GDP) expansion, at more than 8%, is expected to continue through 2020. The demographics are very favorable, with a positive birth rate that means the size of the workforce will continue to grow, which adds up to more productivity.

He said that the country is well-placed to benefit from globalization and outsourcing. It has one of the largest English-speaking populations in the world. Sectors he believes will benefit include pharmaceuticals, projected to triple to $25 billion in the next two-to-three years and mobile phones, which are adding more than 75 million subscribers per year. His suggested plays include the iPath MSCI India Index ETN (NYSE: INP) or the India Fund (NYSE: IFN).

Deepak Lalwani, director, Astaire and Partners, Ltd., remarked that the Bombay Stock Exchange Sensex index over the last five years has risen 600%. The question becomes, can the party carry on, or should investors take money off the table? Lalwani avers that India is a long-term story.

Its economic growth over the last four years, at 8.6%, is the highest ever. The country has a rising savings and investment rate, high corporate earnings and the reforms the government began in 1991 have given rise to a vast array of entrepreneurial talent, participating in the transfer of the economy from state-run to privately operated enterprises.

Domestic demand is accelerating, and just 15% of the economy is export-driven. However, there are some risks that could slow down reform, including coalition politics, 'hot potato' labor laws, the lack of social cohesion, tensions in Iraq and Iran, as well as oil shocks due to the significant ramp up in prices.
 
Lalwani suggests that investors approach the market very broadly, utilizing mutual funds, investment trusts, unit trusts, and exchange-traded funds. He says the best sectors in which to invest are infrastructure, mobile phones, retail, banks, autos, and pharmaceuticals.

Rajiv Shah, head of equities, First Trade India, gave attendees a rundown of statistics that help make the case for continued opportunities in India, including:

  • Only 7% of households currently invest in capital markets.
  • Of its over 1 billion population, just 380 million Indians have an annual household income of more than $10,000, but that is forecast to grow to 550 million by 2010.
  • Indians are big savers, accounting for some 80% of the economy's aggregate savings.
  • Foreign funds inflows are bringing greater liquidity and transparency to the markets.

Shah concurred with both previous speakers, finding the telecom, pharmaceuticals, and  construction industries particularly attractive. He noted that India has one of the fastest-growing phone markets in the world, adding more than eight million new subscribers per month. 138 million cell phones are currently in place, and that number is expected to grow to 450 million by 2010. Internet accessibility is also on the upswing, with wireless access growing by 85% annually.

Shah said the $12 billion construction market is rapidly expanding, due to a growing middle class, liberal credit policies, attractive interest rates, as well as a shortage in housing, commercial, retail, and hospitality space.

Healthcare outsourcing is growing at a 37.6% annual rate, expected to increase from $929 billion in 2006 to $3.3 billion by 2010.

His recommendations include: Reliance Infocom, a subsidiary of Reliance Group (NSE: Reliance.ns), Idea Cellular (NSE: IDEA.ns), Bharti Airtel (Bombay: 532454.BO)Unitech Ltd. (NSE: Unitech.ns), DLF (NSE: DLF.ns), Dr. Reddy's Lab (traded as an ADR on multiple exchanges), and Ranbaxy Labs, Ltd. (NSE: Ranbaxy.ns). (NSE is the National Stock Exchange of India.)

Nicholas Vardy, editor, Vardy's Global Bull Market Alert, Vardy's Global Stock Invest, and Global Guru cautioned investors to keep their optimism on the Indian markets and economy in perspective.

Vardy agreed that India's prospects continue to look promising. India is the third or fourth largest economy in terms of purchasing power and has created more billionaires than anywhere else in Asia. However, in real terms, India is an economic minnow.

Its $800-billion GDP is less than one-half that of the state of California, approximately the size of Florida. Just one in 50 Indian households has a credit card. Only one in six families has a refrigerator, and more than 260 million Indians live on less than a dollar a day.

Infrastructure is so poor that it takes eight days to travel the 1,340 miles between Calcutta and Mumbai. It requires 15 licenses from 11 government bodies to open a new business, and it takes six months to secure them, in order to open new business. Also, outsourcing is ebbing as a result of labor shortages.

Yet, Vardy remarked that there were plenty of reasons to think India would continue to provide big profits for investors. The government is committed to reform, the populace has a high savings rate, and its citizens have a very strong work ethic. Additionally, with one-third of the population under the age of 15, India's demographics-as compared to China's aging citizenry-are very favorable. However, Vardy concluded, investors would be well-served to remain realistic.

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