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The Elephant In The Room – Is India The New China?


  • The Indian economy is growing at 7% and the demographics are still very positive.
  • The market is overvalued from a global perspective but the growth should remedy that.
  • Investment exposure to India can be achieved by investing directly in ADRs or ETFs.

Introduction

A country often dwarfed by its northern neighbor and still not perceived by the investment community as significant is India. As most news is about China, this article is going to give a perspective on the investment potential India offers.

Investing is a function of timing, investing at peak euphoria usually means buying high and selling low when the bubble bursts. But for the more daring investors India still represents an opportunity to buy before it becomes a bubble.

India and Its Economy

India has a population of 1.29 billion and the population is expected to peak in 2065 at 1.64 billion. GDP per capita is $1,820 which is 29 times lower than the US GDP per capita and shows the potential India has. The average American earns $130 a day, a Chinese person $20 and an Indian $10 when adjusted for purchasing parity, so there is plenty of room to grow. The economy is currently growing at a 7.7% yearly rate and that is also the average for the last 10 years.

1 figure India growth
Figure 1: Indian GDP growth in the last 10 years. Source: Trading Economics.

The low starting point of the Indian economy and aggressive growth rate creates enormous potential. The Indian economy has to grow 3.7 times to reach the development level China currently has. A good side of the Indian economy is that the growth, unlike the Chinese based on manufacturing and construction, is based on services. India has become a major exporter of IT, business outsourcing and software. But the road to go is still long as 50% of the Indian population still works in agriculture although the trend is positive as about 11 million people a year are expected to shift from rural to urban employment.

Political Issues

On the political side India is a parliamentary democracy where the Prime Minister is the head of the government. As in many developing countries political issues cannot be avoided and corruption is a big issue.

2 figure India corruption
Figure 2: Global corruption index. Source: Transparency International.

India ranks 76th out of 168 on the global corruption list so investors have to be aware that the ways of doing business in India are different than in the Western world. Corruption is accompanied by a shaky bank system with the worst non-performing loan percentage in Asia.

3 figure non perfroming loans
Figure 3: Non-performing loans. Source: International Monetary Fund.

Apart from various negative issues that should be considered normal for such a big and developing country, a positive note is the ambition of the Indian prime minister Narendra Modi. Elected a year ago his goal is to make this century India’s century and to modernize the country by developing the poorer parts of India where many treatable diseases still linger and education is poor. Many of the goals seem trivial to us but opening 75 million bank accounts or building 100 million toilets would do a lot for the poor parts of India. Also the average Indian person is becoming more demanding which should push the economy forward. Indians want better phones, better internet connections, better infrastructure and more purchasing power.

India does not differ from other emerging countries apart from the enormous potential coming from its low starting point and still huge demographic growth.

Investing Fundamentals

The massive population and growth potential is not unknown, so the valuation of the Indian market is not really cheap. Indian markets have a PE ratio of 20.7 which is similar to the US but much higher than the global average for emerging markets.

4 figure india PE
Figure 4: Global PE ratio map. Source: Starcapital.

A PE ratio of 20 can be considered high, but with an economy growing at 7% and expected to grow at that rate for the foreseeable future, the PE ratio should become only higher.

Investing Opportunities

The Indian stock market has two major exchanges: The National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE). The market has been growing alongside the economy and has grown 10-fold since the beginning of this century.

5 bombay stock index
Figure 5: Indian stock market index. Source: Trading Economics.

A part of the growth is related to something that is also a risk when investing abroad. India has been constantly depreciating its currency by keeping a higher inflation rate and encouraging exports. In the last 10 years the Indian Rupee has depreciated by 50% in relation to the US dollar which would make the real return just a five bagger, which is still not bad.

If investing directly on Indian stock markets might be difficult and un-secure and you think that a part of your portfolio should be exposed to the potential India offers, an opportunity lies in Indian ADRs traded on US stock exchanges.

S. No.CompanyTickerExchange Industry
1Dr. Reddy's LaboratoriesRDYNYSEPharma. & Biotech.
2HDFC BankHDBNYSEBanks
3ICICI BankIBNNYSEBanks
4InfosysINFYNYSESoftware & Computer Svc
5MakeMyTrip LimitedMMYTNASDAQTravel & Leisure
6Rediff.com IndiaREDFNASDAQSoftware & Computer Svc
7Sify Technologies LimitedSIFYNASDAQSoftware & Computer Svc
8Tata MotorsTTMNYSEIndustrial Engineer
9VedantaVEDLNYSEIndust.Metals & Mining
10Videocon d2hVDTHNASDAQTV Services
11WiproWITNYSESoftware & Computer Svc
12WNS HoldingsWNSNYSESupport Services
Table 1: Indian ADRs. Source: topforeignstocks.com.

 

For the investors who like to be more diversified, there are various ETFs.

TickerCompanyPriceChange AssetsAvg VolYTD
INDAiShares MSCI India ETF$26.320.50%$3,399,4081,892,800.0-4.3%
EPIWisdomTree India Earnings Fund$18.840.91%$1,323,7503,753,153.0-5.1%
INDYiShares India 50 ETF$26.380.76%$758,205181,741.0-3.0%
PINPowerShares India Portfolio ETF$18.420.82%$372,708922,905.0-5.1%
INPiShares MSCI Spain Capped ETF$61.200.72%$238,4969,669.0-4.2%
SCIFVanEck Vectors India Small-Cap Index ETF$38.19-0.05%$173,84771,233.0-11.7%
INCOEGShares India Consumer ETF$30.940.98%$70,79414,889.0-3.6%
INDLDirexion Daily India Bull 3x Shares ETF$42.502.16%$66,44733,131.0-21.1%
SMINiShares MSCI India Small-Cap ETF$30.51-0.29%$53,97016,706.0-8.3%
INXXEGShares India Infrastructure ETF$10.160.10%$39,46816,442.0-3.8%
SCINEGShares India Small Cap ETF$13.00-1.14%$17,9826,734.0-17.1%
Figure 7: Indian ETFs by market capitalization. Source: ETF Database.

 

Conclusion

As an investment opportunity, India looks quite scary with its corruption, low income, shaky banking system and depreciating rupee but those are the illnesses that affect every emerging market. An investor who can withstand those issues and wait for India to grow into the country it has the potential to become can be rewarded with returns similar to the ones enjoyed by investors that invested in India 15 years ago. There will for sure be ups and downs but the long term trends are pretty clear: India is changing with new technologies pushing Indians to want a western lifestyle and demographic trends that are bound to result in more economic growth.

 

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