As the Asian economy has grown in size and importance, we've been slowly adding the single-country funds dedicated to Asian countries to the 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 risk of a fund dedicated to a single country was a reasonably large and diversified capital market that offered a portfolio manager the ability to diversify the portfolio even within a single country. Because the Japanese and Chinese economies grew and new industries blossomed, we thought that test was met. We now genuinely believe that the Indian economy and capital markets also meet our test. With this issue, then, we are adding three India funds to the list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We may add one or two other funds to the list over the next few issues.
Why India?... Frequently before once we spoke about Asia and its rapid growth we cited the twin dynamos powering that growth, China and India. Coupling both served its purpose, but we now believe the 2 are taking on separate identities. As we have been listening and reading within the course of days gone by 4 or 5 months, we have come to in conclusion there are differences in the paths that China and India is likely to be overpowering the months ahead. Both is likely to be growing rapidly (or intend to) but one is concerned about too-rapid growth (China) while the other is aiming at even more quickly growth in the foreseeable future (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 regarding indien fonds. The first point that Shroff made is that "some of the days ahead for India (speaking of growth) may be much better than what has been seen over the past two to three years." For a few historical perspective, Shroff remarked that India's growth rate acquired after the government adopted a policy of checking the economy in the early 90's. Since then, as more reforms were gradually introduced, growth has acquired further. By 1995, India's growth hit the high single-digits range and remained there (on average). Such growth has become taken whilst the benchmark.
Shroff emphasized that why is India's growth different from other emerging countries is that in large part it arises from domestic demand, not from exports or commodities. There's 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 will need to shrink since they will be unsustainable. India faces no such issues.
The second 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 speaking about businesses which are oriented toward profits and return on capital. This isn't always the case elsewhere in Asia. Because of these conditions, India supplies the investor to be able to purchase good quality companies with solid business models.
In terms of Matthews India, Shroff said that the fund does definitely not spend money on the large cap, world-renowned companies (the Indian blue chips). As Shroff put it, in the event that you compare our portfolio with the benchmark, you will observe that two-thirds of our portfolio is composed of small- and mid-cap stocks. We play the role of much more forward-looking. What the fund is searching for are those (smaller) companies which are "participating in the country's growth and have the potential to become one of many larger companies two, three or possibly five years from now."
The Indian market...We asked Mr. Shroff, what index you need to watch to keep an eye on the Indian market. He answered that the Sen*** is the standard index followed. But in recent years, the professional community pays more awareness of the S&P CNX Nifty Index.
For valuations, the Indian market, says Shroff, is selling at a price-earnings ratio of about 15-16 times and at about 3 x book value. This really is slightly above historical average valuations. Also Shroff remarked 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%. Right now he puts the premium at the reduced end of the range.
There is some justification for the premium, he added. The return on equity for Indian firms is in the 18-20% range, which, as he put it, "is quite robust." Another reason refers back again to the inner sources of India's growth so that you get less volatility than you do from the "commodity producer."
That's not to say that the Indian market isn't volatile. "Even although economy might be dancing to its 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 to four years the Indian market indicates some correlation with the S&P 500." (We discover that recently to possess been true of emerging markets as a whole.)
Shroff looked to the issue of volatility a lot more than once. He was preaching to the converted. We are restricting our advice regarding the Indian funds to Venturesome investors only. This is actually the same policy that people have been following with regard to the pure China funds. The policy isn't written in stone, but the world economy would have to be functioning closer on track before we would consider any relaxation.
Following the interview with Shroff, we were a lot more convinced that the single-country India funds belong inside our fund list. Not just is India growing rapidly, but we expect you'll see the emergence of more investment -- worthy companies as opportunities arise. Considering the potential, you are able to appreciate why Asia and the emerging markets, in general, have grown to be the middle of the investment world's attention.