Indian stocks have been under significant pressure in recent months after Prime Minister Narendra Modi implemented a controversial demonetization program. On Nov. 8, Modi announced that the country would be scrapping its two highest-denomination bills. The effort is reportedly intended to reduce the impact of corruption, tax evasion and counterfeiting in India.
So far, the process of replacing the old 1,000-rupee and 500-rupee notes hasn’t exactly gone smoothly. In early January, the Indian government lowered its GDP growth forecast for the fiscal year ending in March from 7.6% to 7.1%. Economists are forecasting growth in the 6.3%-6.4% range in the coming fiscal year.
The prospect of an economic slowdown in one of the largest emerging markets in the world clearly spooked investors.
However, American investors should make sure to keep the Indian slowdown in perspective. The currency-related sell-off in Indian stocks has provided long-term investors with an excellent opportunity to buy the dip.
India’s Long-term Grown Prospects Remain Impressive
Investors should certainly pay attention to any economic slowdowns. However, U.S. investors need to appreciate the differences between the Indian economy and the U.S. economy.
In the most recent U.S. quarter, GDP growth came in at 3.2%, its highest level in more than two years. In the past five years, U.S. GDP growth has been mostly flat in the 1%-3% range, and the S&P 500 has climbed 77% to new all-time highs.
In India, on the other hand, GDP growth was around 5% annually five years ago before it steadily increased to the 7%-8% range in the past two years. Even after the demonetization slow-down, India’s projected growth in the upcoming fiscal year is roughly twice the growth rate of the U.S. economy.
American investors should also realize that by 2020, the Indian economy will likely be the third-largest economy in the entire world behind just the U.S. and China.
A huge part of that growth will come from younger Indians in the country’s exploding middle class. While the median age in the U.S. and China is over 37 years, India’s median age is only 27.3 years. Not only does India have more than 1.2 billion residents, its younger working population is growing by leaps and bounds.
Learning From China
U.S. investors don’t have to look very far into the past to find a time when currency scares created an excellent buying opportunity in an emerging-market country. This time last year, even U.S. stocks were selling off on fears the sky was falling in China.
How bad was it? China’s GDP growth slowed to only 6.7% in the past three quarters. Those numbers aren’t impressive for China compared to recent history. However, an economy the size of China’s growing at 6% annually is creating an incredible amount of wealth.
Last year, Boston Consulting Group projected that the Chinese economy would add $2.3 trillion from 2016-2020.
Sometimes it’s difficult for investors to look four or five years into the future if they see the stock market falling on a week-to-week basis. However, investors who bought the dip in China last year have been handsomely rewarded.
Despite the China fear that gripped Wall Street this time a year ago, the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) is up 15.7 percent in the past year. U.S. investors will likely see the same kind of rebound from Indian stocks in the years ahead.
Best Ways to Invest In Indian Stocks
There are only a handful of Indian companies that are listed on U.S. exchanges. American investors are often skeptical of the reliability and transparency of foreign companies, especially in emerging markets like India and China. U.S. investors can minimize their risk by choosing diversified ETFs instead of investing in individual stocks.
The Market Vectors India Small Cap Index ETF (NYSEARCA:SCIF) is one of the more aggressive India plays available. The SCIF is one of the best pure plays on India because it doesn’t include shares of large-cap Indian stocks with international exposure. The SCIF contains 158 small-cap Indian stocks that have primarily domestic businesses. Expenses run at 0.78%, or $78 per $10,000 invested.
For investors who don’t mind a bit of international exposure in exchange for additional stability, the iShares MSCI India ETF (BATS:INDA) invests in 77 of the largest Indian companies. Expenses are 0.71%.
Finally, for investors interested in a more diversified option, the iShares MSCI Emerging Markets Indx (ETF) (NYSE:EEM) holds shares of more than 800 of the largest companies from emerging markets around the world. In addition to its 8% exposure to India, the EEM ETF also has 28% exposure to China, 14% exposure to South Korea and 13% exposure to Taiwan. Expenses are 0.67%.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
