Whilst the Asian economy has grown in proportions and importance, we've been slowly adding the single-country funds devoted to Asian countries to the international funds list.
The initial country we added was Japan, and much later China. What we required to be able to present you with the added risk of a fund focused on an individual country was a fairly large and diversified capital market that offered a portfolio manager the opportunity to diversify the portfolio even inside a single country. Whilst 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 issue, then, we are adding three India funds to our 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 previously 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 dealing with separate identities. As we've been listening and reading on the length of days gone by 4 or 5 months, we came to in conclusion there are differences in the paths that China and India is going to be overpowering the months ahead. Both will be growing rapidly (or intend to) but one is concerned about too-rapid growth (China) while the other is aiming at much faster growth in the foreseeable 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 "some of the days ahead for India (speaking of growth) might be much better than what's been seen over the past 2 to 3 years." For a few historical perspective, Shroff pointed out that India's growth rate acquired after the government adopted a policy of setting up the economy in early 90's. Since then, 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 while the benchmark.
Shroff emphasized that what makes India's growth distinctive from other emerging countries is that in large part it originates from domestic demand, not from exports or commodities regarding China Fonds. 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 because 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 are 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 provides the investor an opportunity to spend money on high quality companies with solid business models.
As for 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, if you compare our portfolio with the benchmark, you will notice that two-thirds of our portfolio is made up of small- and mid-cap stocks. We try to be a little more forward-looking. What the fund is looking 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 perhaps five years from now."
The Indian market...We asked Mr. Shroff, what index one should watch to keep track of the Indian market. He answered that the Sensex is the original 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 around 15-16 times and at about three times book value. This is slightly above historical average valuations. Also Shroff pointed out that the Indian market has traditionally been expensive compared 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 low 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 put it, "is fairly robust." Another reason refers back once again to the interior resources of India's growth so you get less volatility than you do from a "commodity producer."
That is not saying that the Indian market is not volatile. "Even although the economy might be dancing to a unique tune," Shroff warned, "when foreigners were pulling out money from all emerging markets in 2008, the Indian market went by way of a very severe correction. (In fact) in the last three to four years the Indian market has shown some correlation with the S&P 500." (We discover that recently to own been true of emerging markets as a whole.)
Shroff considered the issue 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 people have already been following pertaining to the pure China funds. The policy is not written in stone, but the entire world economy would have to be functioning closer to normal before we would consider any relaxation.
Following the interview with Shroff, we were a lot more convinced that the single-country India funds belong within our fund list. Not only is India growing rapidly, but we expect you'll start to see the emergence of more investment -- worthy companies as opportunities arise. Considering the potential, you can appreciate why Asia and the emerging markets, generally, have grown to be the center of the investment world's attention.