As the Asian economy has grown in dimensions and importance, we've been slowly adding the single-country funds specialized in Asian countries to our international funds list. The very first country we added was Japan, and much later China. What we required in order to present you with the added danger of a fund focused on just one country was a reasonably large and diversified capital market that offered a portfolio manager the chance to diversify the portfolio even in just a single country. Since the Japanese and Chinese economies grew and new industries blossomed, we thought that test was met. We now feel that the Indian economy and capital markets also meet our test. With this problem, then, we are adding three India funds to the list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We may add 1 or 2 other funds to the list over the next few issues. japan fonds
Why India?... Frequently in the past when we spoke about Asia and its rapid growth we cited the twin dynamos powering that growth, China and India. Coupling the 2 served its purpose, but we now believe both are taking on separate identities. As we have been listening and reading over the course of yesteryear 4 or 5 months, we have come to the conclusion that there are differences in the paths that China and India will be overpowering the months ahead. Both will be growing rapidly (or intend to) but one is worried about too-rapid growth (China) while the other is aiming at much faster growth as time goes on (India).
To sort things out, and to obtain a better feel for the Indian economy and the capital market, we spoke to Sharat Shroff, the portfolio manager of the Matthews India Fund. The initial point that Shroff made is that "a few of the days ahead for India (speaking of growth) may be much better than what has been seen over the past 2 to 3 years." For many historical perspective, Shroff remarked that India's growth rate acquired after the federal government adopted a policy of opening up the economy in early 90's. Since that time, as more reforms were gradually introduced, growth has picked up further. By 1995, India's growth hit the high single-digits range and remained there (on average). Such growth is now taken since the benchmark.
Shroff emphasized that what makes India's growth distinctive from other emerging countries is that in large part it arises from domestic demand, not from exports or commodities. There is no large-scale overhaul that India must undergo, he remarked. What Shroff is driving at is that in the post-recession world China's trade surpluses and the U.S. deficit must shrink since they will be unsustainable. India faces no such issues.
The 2nd point advanced by Shroff is that the private sector accounts for roughly 80% of India's growth. The significance of that's that in India we're referring to businesses which can be oriented toward profits and return on capital. This is simply not always the case elsewhere in Asia. Because of these conditions, India provides the investor an opportunity to invest in top quality companies with solid business models.
In terms of Matthews India, Shroff said that the fund does not necessarily spend money on the large cap, world-renowned companies (the Indian blue chips). As Shroff use it, if you compare our portfolio with the benchmark, you will observe that two-thirds of our portfolio is comprised of small- and mid-cap stocks. We act as a bit more forward-looking. What the fund is trying to find are those (smaller) companies that are "participating in the country's growth and have the potential to become among the larger companies two, three or perhaps five years from now."
The Indian market...We asked Mr. Shroff, what index one should watch to keep an eye on the Indian market. He answered that the Sensex is the traditional index followed. But recently, the professional community pays more attention to the S&P CNX Nifty Index.
In terms of valuations, the Indian market, says Shroff, is selling at a price-earnings ratio around 15-16 times and at about three times book value. This really is slightly above historical average valuations. Also Shroff pointed out that the Indian market has traditionally been expensive in comparison to its emerging market peers. The premium has ranged from only 15% to as high as 45%. At this time he puts the premium at the reduced end of the range.
There's some justification for the premium, he added. The return on equity for Indian firms is in the 18-20% range, which, as he use it, "is very robust." Another reason refers back to the interior sources of India's growth so you get less volatility than you do from the "commodity producer."
That is not saying that the Indian market isn't volatile. "Even although economy may be dancing to a unique tune," Shroff warned, "when foreigners were pulling out money from all emerging markets in 2008, the Indian market went through a very severe correction. (In fact) in the last three or four years the Indian market has shown some correlation with the S&P 500." (We find that recently to own been true of emerging markets as a whole.)
Shroff turned to the matter of volatility more than once. He was preaching to the converted. We're restricting our advice regarding the Indian funds to Venturesome investors only. This is actually the same policy that individuals have now been following pertaining to the pure China funds. The policy isn't written in stone, but the planet economy will have to be functioning closer to normalcy before we'd consider any relaxation.
After the interview with Shroff, we were much more convinced that the single-country India funds belong in our fund list. Not just is India growing rapidly, but we be prepared to see the emergence of more investment -- worthy companies as opportunities arise. Taking into consideration the potential, you can appreciate why Asia and the emerging markets, generally, have become the middle of the investment world's attention.