Silk Road Banks on India

06/23/2006 12:00 am EST

Focus:

Yiannis Mostrous

Editor, The Capitalist Times

"India remains by far the most important growth story in global emerging markets," says Yiannis Mostrous in The Silk Road Investor."India is home to the most diverse group of quality companies across a range of sectors. "Here’s his look at the region and his top play.

"Although India never exhibited the strong growth characteristics as the rest of Asia and can’t match China’s reported growth rates, it’s also avoided the boom-and-bust cycles so prevalent in the region’s developing economies. For an investor interested in achieving serious long-term returns, this fact is of paramount importance. And because India still represents only 2% of global GDP and 1% of world trade, it’s been less important to investors, even after accounting for the strong interest shown by investors since 2004.

"Nevertheless, foreign direct investment (FDI) continues to steadily increase. And as India tackles the problems that slow its growth, FDI will only grow. The Indian government is aware of such problems, and efforts are being made to offer solutions. One of them is the creation of Special Economic Zones (SEZs).

"Since the new SEZ law was approved in February, there’s been a huge rush from private sector companies to capitalize on it. But above all the Indian story remains a domestic one, in the sense that domestic investment and consumption drive monetary expansion, leaving the country less vulnerable to violent moves in the global economy.

"Since the mid-February launch of our newsletter, many questions have been raised regarding my reluctance to have significant Indian exposure in the Portfolio. In answering these questions, I’ve always noted that India was due for a pullback and specifically noted the increased likelihood of one in the context of a synchronized global equity correction. This has happened. And although markets can go lower, the time has come to look into some opportunities.

"Meanwhile, financial services is one of the fastest growing sectors in India. Aside from banking, mortgage, and other related functions, life insurance is particularly promising as Indians have welcomed this new private service with true excitement. The Indian market was first opened to foreign insurance investment in 2000, and since then, about 25 players have entered. Entry to the domestic market is accomplished via joint ventures (JVs) with domestic providers.

"ICICI Bank (IBN NYSE) has been capitalizing on the increase in domestic consumption and credit growth. Once not very well run but now a franchise in turnaround, ICICI is a good way to get exposure to India’s banking sector as well as the life insurance boom. Prudential ICICI is the second largest player and the largest private player in India’s life insurance industry, which is still dominated by the state-run Life Insurance Corporation of India (LIC).

"Prudential ICICI has grown its new business annualized premium equivalent (APE) at 104% in the last three years and has improved its market share from 2% to 10% in the same period. Low penetration of life insurance in India (3% of GDP) and market share acquisition from LIC have been the key growth drivers. ICICI Bank is now a member of the our Silk Road Investor model portfolio."

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