While the Asian economy has grown in dimensions and importance, we have been slowly adding the single-country funds devoted to Asian countries to your 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 chance 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 believe 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 might add 1 or 2 other funds to the list over the next few issues.
Why India?... Frequently before whenever 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 the 2 are taking on separate identities. As we've been listening and reading over the span of yesteryear four to five months, we came to in conclusion that there are differences in the paths that China and India will be overtaking the months ahead. Both is going to be growing rapidly (or intend to) but one is worried about too-rapid growth (China) while another is aiming at even 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 initial point that Shroff made is that "a few of the days ahead for India (speaking of growth) may be a lot better than what's been seen over the past 2 to 3 years." For many historical perspective, Shroff noticed that India's growth rate acquired after the federal government adopted a policy of opening the economy in early 90's. 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 now taken while 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's no large-scale overhaul that India needs 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's that in India we're speaing frankly about businesses which can be 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 an opportunity to purchase good quality companies with solid business models.
In terms of Matthews India, Shroff stated that the fund does certainly not spend money on the large cap, world-renowned companies (the Indian blue chips). As Shroff put 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 try to be much 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 possibly five years from now."
The Indian market...We asked Mr. Shroff, what index one should watch to record the Indian market. He answered that the Sensex is the standard index followed. But in recent years, the professional community pays more attention to the S&P CNX Nifty Index.
As for valuations, the Indian market, says Shroff, is selling at a price-earnings ratio of approximately 15-16 times and at about three times book value. This 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 as little as 15% to as high as 45%. At this time he puts the premium at the lower 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 quite robust." Another reason refers back once again to the interior sourced elements of India's growth so you get less volatility than you do from the "commodity producer."
That's not to say that the Indian market is not volatile. "Even though the economy may 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 three to four years the Indian market has shown some correlation with the S&P 500." (We find that recently to possess been true of emerging markets as a whole.)
Shroff looked to the matter of volatility a lot 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 individuals have now been following regarding 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'd consider any relaxation.
Following the interview with Shroff, we were even more convinced that the single-country India funds belong inside 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 regarding ishares Asia Pacific Dividend. Considering the potential, you can appreciate why Asia and the emerging markets, in general, are becoming the middle of the investment world's attention.