Gue's Views on India
02/20/2004 12:00 am EST
"Looking out over the coming decade, there isn't a theme that permeates the markets more than Asia, which has been the driver of economic growth throughout the world," says Elliott Gue, editor of Wall Street Winners. Here, he looks at an Indian bank and an Indian-based generic drug firm.
"In my opinion, the Asian growth story is just beginning to be understood by investors. We see cheap valuations and tremendous under-ownership by foreign investors. Obviously, there is investment in China and India, but it's not yet a huge trend, and there is a lot more room for foreigners to pour more money into these markets. Most people think Asia is growing because of its exports to the US. However, I believe there is growing, durable demand within Asia, and they will continue to grow on their own merits. Asia has wonderful demographics; there is a tremendous population of people under 30, who just starting to make money, which will fuel massive consumption over the next decade.
"For investors, this won't be a straight line up, as events such as SARs and the scare over Avian flu will emerge and there will be corrections in these markets. But massive tailwinds of demographics and consumerism, and the availability of credit, will continue to power Asian stocks over the next ten years.Within Asia, I'd like to talk about India in specific. One of the fastest growing sectors there is service. They have a very skilled workforce in India, focusing on service-sector jobs, rather than manufacturing jobs. China has a cost advantage on the manufacturing side, while India probably has a more skilled workforce, at least on the service side. Due to the days of the British empire, many Indians speak English, which helps in such areas as call centers. You may have called Dell Computer or American Express and been talking to someone in Bombay. There is a lot of outsourcing, and while wages are very low by US standards, they are quite high by Indian standards.
"Our first recommendation is a bank, HDBC (HDB NYSE), a fairly liquid ADR. This is the fastest growing bank in all of Asia. This fits right in with the trends we see. There is a huge population of young people and an increasing availability of credit. For example, mortgages in India grew by 30% annualized last year. That's a massive amount, which is allowing Indians to both buy houses and also spend money, which will fuel consumption. These people are able to take out mortgages and buy homes, partly because of the strength in the service sector. That credit in turn leads to consumer spending. Mortgages still only make up about 2% of GDP in India. In the US, it's about 20 or 30 times that level. Credit cards are almost unheard of in some Asian countries. So there is still time for that population to take on mortgages and other debt. This is what fueled the boom in Europe and the US. This is now starting to fuel the boom in Asia. HDBC has a double-digit return on equity. We saw 31% earnings growth for this company in the latest quarter. We don't see these trends ending anytime soon.
"The second stock we like in India is a generic drug maker, Dr. Reddy's (RDY NYSE). India's workforce is particularly skilled in the medical field. They have doctors there, many of whom were trained in the US or Western Europe and they have several excellent medical schools within India. So they are able to develop generic drugs. Yet, a PhD in India gets paid a fraction of what one in the US would make. As a result, they have an extreme advantage over US companies seeking to develop new or generic drugs. We also know that generic drugs are becoming more important in the US, due to rising healthcare costs. Dr. Reddy's first product was a generic form of Prozac. In addition to generics, they are now also doing their own drug development. They are seeing tremendous growth, and we don't see that stopping anytime soon. About $5 billion in drugs are coming off patent in 2005 and that will boost the bottom line of generic drug makers. We think the trend towards generics will accelerate and this company continues to have a tremendous cost advantage."