When it comes to investing in emerging markets, China is seen as the 800-pound gorilla — or in this case, dragon — in the room. But as we’ve seen in recent quarters, the dragon’s flame may be going out.
As that nation has struggled to transition from a manufacturing/export driven economy to one based on consumerism/internal consumption, growth has fallen by the wayside.
And while China is still set to deliver enviable amounts of growth — especially when compared to the U.S. and Europe — it can no longer hold the emerging market pole position.
Nope … that place belongs to India.
The I in BRIC could be the only game in town. As China has fallen off, India continues to be one of few bright spots in the global economy. Featuring great demographics, rising middle class incomes and a leader who seems to be getting the job done, Indian stocks could be some of the best buys for long-term investors.
Indian Stocks Get a Boost
Much of India’s recent appeal stems from the 2014 election of Prime Minister Narendra Modi. Modi applied many of the same-styled reforms he used when he was in charge of the Indian state of Gujarat. That meant cutting corruption, removing bureaucratic red tape and enacting a hefty dose of fiscal stimulus.
Caps on foreign direct investment were removed to help drive infrastructure spending, while Modi and his team have taken inflation to the woodshed.
As a result of these structural reforms and removing government intervention, the International Monetary Fund projects that India will see GDP growth of 7.5% this year and into 2017. This beats China’s growth forecast of around 6%. That number could jump to nearly 10%, if Modi’s reforms are truly successful.
And while Modi’s election and subsequent reforms have already provided a shot in the arm for Indian stocks, there’s still plenty to be excited about over the long haul.
For one thing, favorable demographics.
India features a large and relatively young working population. India’s median age is 27. That’s versus 37 years old for China and 46.5 for Japan. What’s truly impressive is that young population is spread over more than 1.25 billion people.
Add in India’s torrid rate of population growth and you have a recipe for a strong working class population that still has many years of productivity left.
What’s more is that this huge, young population has the potential to become a major consumer force. Think the baby boomers hitting their peak spending years in the 1980’s and 1990’s, only multiply that by a much, much larger population base.
Add in the fact that the commodities bust actually works in India’s favor since it imports much of the natural resources it needs and you have a recipe for long-term success. Goldman Sachs Group Inc (GS) estimates that India stocks should offer returns in the low-to-mid teens this year when accounting for currency fluctuations.
Adding Some Indian Stocks
With the short-, near- and long-term picture rosy for the emerging market nation, investors may want to overweight Indian stocks.
One of the easiest ways could be the iShares MSCI India ETF (INDA). The $3.2 billion exchange-traded fund tracks the MSCI India Total Return Index. This index holds large- and mid-cap Indian stocks and represents roughly 85% of the nation’s total market cap through a sampling strategy. Top holdings include tech consultancy Infosys Ltd ADR (INFY) and ICICI Bank Ltd (ADR) (IBN). Returns for the fund have been erratic, with small loses followed by big gains. Last year was a down year for the ETF, so if the pattern holds true, INDA should provide a hefty boost for investors this year. Expenses run at 0.68%, or $68 per $10,000 invested per year.
Another potential play on Indian stocks, its huge population and future consumer base is through small-cap Indian stocks. Small caps — especially those in emerging markets — often have zero sales/revenues outside their home nations. This makes them real plays on the Indian economy. The Market Vectors India Small-Cap Index ETF (SCIF) has more than 52% of its portfolio in consumer, financials and healthcare related equities. That gives it a strong edge in playing the rising consumer demand of India. Its expenses are 0.89%.
Finally, given that the opportunity in India is just beginning, India stocks represent an area where active management may actually make sense. Matthews Asia does one thing — and that’s invest in Asian stocks. The $1.3 billion Matthews India (MINDX) mutual fund combs the nation for Indian stocks that are trading to reasonable values that will provide plenty of long-term growth. While expensive at 1.12% in expenses, MINDX has managed to produce some pretty decent returns for investors. Investing $10,000 into the fund ten years ago would be worth north of $32,000 today.
Indian Stocks Are Where It’s At
India has officially become the king of economic growth. The nation is poised to do well over the longer term as reforms and its powerful demographics take hold.
For investors, that means loading up on Indian stocks in the new year.
As of this writing, Aaron Levitt was long INDA stock.
