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While the Asian economy has grown in proportions 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 specialized in just one country was a fairly large and diversified capital market that offered a portfolio manager the ability to diversify the portfolio even inside a single country. As the Japanese and Chinese economies grew and new industries blossomed, we believed that test was met. We now think that the Indian economy and capital markets also meet our test. With this problem, then, we're adding three India funds to the list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We might add 1 or 2 other funds to the list over another few issues.
Why India?... Frequently before when 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 two are taking on separate identities. As we've been listening and reading over the span of days gone by 4 or 5 months, we came to in conclusion that there are differences in the paths that China and India will soon be taking over the months ahead. Both is likely 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 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) might be much better than what has been seen within the last 2 to 3 years." For a few historical perspective, Shroff noticed that India's growth rate found after the us government adopted a policy of checking the economy in 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 is now taken whilst the benchmark.
Shroff emphasized that why is India's growth different from other emerging countries is that in large part it comes from domestic demand, not from exports or commodities. There is no large-scale overhaul that India has to 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 being that they are 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 is that in India we're discussing businesses that are oriented toward profits and return on capital. This isn't always the case elsewhere in Asia. Because of the conditions, India offers the investor a chance to invest in high 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 use it, if you compare our portfolio with the benchmark, you will realize that two-thirds of our portfolio is made up of small- and mid-cap stocks regarding ETF Indien. 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 the larger companies two, three or even five years from now."
The Indian market...We asked Mr. Shroff, what index you ought to 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 focus on the S&P CNX Nifty Index.
As for 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 is slightly above historical average valuations. Also Shroff noticed 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%. 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 fairly robust." Another reason refers back again to the interior resources 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 though the economy might be dancing to a unique tune," Shroff warned, "when foreigners were taking out money from all emerging markets in 2008, the Indian market went through a very severe correction. (In fact) within the last few three to four years the Indian market indicates some correlation with the S&P 500." (We find that recently to have been true of emerging markets as a whole.)
Shroff looked to the problem of volatility significantly more than once. He was preaching to the converted. We're restricting our advice regarding the Indian funds to Venturesome investors only. Here is the same policy that we have already been following with regard to the pure China funds. The policy is not written in stone, but the planet economy would have to be functioning closer on track before we'd consider any relaxation.
After the interview with Shroff, we were even 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, generally, are becoming the biggest market of the investment world's attention.
The Wall