It is true that inflation is a problem in the developing world as the consumer price indexes are very different there. In the United States, we have the luxury of having the CPI overweight almost 40% toward real estate-related components, which brings the overall rate down and makes it seem low.
In India — the BRIC market with the deepest correction so far in the first quarter — we saw a bad surprise for February inflation numbers. Inflation unexpectedly accelerated in February, increasing pressure on the central bank to act more decisively.
The wholesale price index rose 8.31% from a year earlier after an 8.23% jump in January, while the forecast was for a 7.8% increase. But, this still leaves India with negative real interest rates as the central bank’s key repurchase rate is 6.5%.
Wholesale inflation is likely around 7%, but the Reserve Bank of India (RBI) shoots for inflation of 4% to 4.5%, so I expect that tightening measures here will likely continue.
As a result, the Indian market may underperform for the next three to six months, but Indian companies are some of the best-run in the BRIC universe and habitually post some of the highest earnings growth rates. This central bank action gives long-term investors an opportunity to buy quality emerging market stocks on sale.
Here are some favorite stock picks that might be of interest to put on your watch list:
Infosys (NASDAQ: INFY) is probably the least affected by the tightening measures of the RBI as it targets global businesses in order to save them money with the patented Indian IT outsourcing strategy.
The company is actually leveraged to the improving U.S. economy, but since it is viewed as a cost-cutting measure by many U.S. corporations, the business does not suffer all that much in economic contractions. Service contracts are reliable and long term in nature and software businesses usually carry high margins. INFY has return on equity of 27.5% and operating margins of 29.7%. Over the latest quarter, revenues grew at 28.7%.
Currently, shares trade at 27 times current and 23 times forward earnings. They are not cheap, but management certainly has delivered over the years to command that valuation.