Since the Asian economy has grown in proportions and importance, we've been slowly adding the single-country funds dedicated to Asian countries to our international funds list. The initial 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 opportunity to diversify the portfolio even inside a single country. While the Japanese and Chinese economies grew and new industries blossomed, we believed that test was met. We now feel that the Indian economy and capital markets also meet our test. With this dilemma, then, we're adding three India funds to your list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We may add one or two other funds to the list over another few issues.
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 two served its purpose, but we now believe both are dealing with separate identities. As we have been listening and reading over the course of yesteryear four to five months, we came to the final outcome that there are differences in the paths that China and India is going to be taking over the months ahead. Both is going to be growing rapidly (or intend to) but one is worried about too-rapid growth (China) while one other is aiming at even more quickly growth in the future (India).
To sort things out, and to acquire 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 first point that Shroff made is that "a number of the days ahead for India (speaking of growth) might be much better than what has been seen in the last two to three years." For some historical perspective, Shroff pointed out that India's growth rate acquired after the federal government adopted a policy of opening the economy in the early 90's. Ever since then, as more reforms were gradually introduced, growth has found further. By 1995, India's growth hit the high single-digits range and remained there (on average). Such growth is currently taken because the benchmark.
Shroff emphasized that what makes India's growth different 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 will have to shrink since they will be unsustainable. India faces no such issues.
The next 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 that are oriented toward profits and return on capital. This is simply not always the case elsewhere in Asia. Because of the conditions, India provides the investor to be able to invest in good quality companies with solid business models.
In terms of Matthews India, Shroff said that the fund does certainly not invest in the large cap, world-renowned companies (the Indian blue chips). As Shroff use it, in the event that you compare our portfolio with the benchmark, you will realize 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 searching for are those (smaller) companies which can be "participating in the country's growth and have the potential to become one of many larger companies two, three or maybe 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 times, the professional community pays more awareness of the S&P CNX Nifty Index.
As 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. That is slightly above historical average valuations. Also Shroff remarked that the Indian market has traditionally been expensive compared to its emerging market peers. The premium has ranged from as low as 15% to as high as 45%. Today 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 once again to the interior sources of India's growth so you get less volatility than you do from a "commodity producer."
That's not to say that the Indian market is not volatile. "Even though the economy might be dancing to its own tune," Shroff warned, "when foreigners were taking out money from all emerging markets in 2008, the Indian market went by way of a very severe correction. (In fact) within the last few 3 or 4 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 turned to the problem of volatility more than once. He was preaching to the converted. We are restricting our advice concerning the Indian funds to Venturesome investors only. This is the same policy that individuals have already been following regarding the pure China funds. The policy isn't written in stone, but the world economy would need to be functioning closer on track before we'd consider any relaxation.
Following the interview with Shroff, we were much more convinced that the single-country India funds belong within our fund list. Not merely is India growing rapidly, but we expect to start to 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, generally speaking, have grown to be the middle of the investment world's attention.