As the Asian economy has grown in dimensions and importance, we've been slowly adding the single-country funds dedicated to Asian countries to your international funds list. The initial country we added was Japan, and much later China regarding asien fonds. What we required in order to present you with the added danger of a fund dedicated to just one country was a reasonably large and diversified capital market that offered a portfolio manager the ability to diversify the portfolio even within a single country. Since the Japanese and Chinese economies grew and new industries blossomed, we believed that test was met. We now genuinely believe that the Indian economy and capital markets also meet our test. With this issue, then, we're adding three India funds to your list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We might add a couple of other funds to the list over another 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 both served its purpose, but we now believe the 2 are dealing with separate identities. As we have been listening and reading over the course of the past four or five months, we came to in conclusion there are differences in the paths that China and India is going to be overtaking the months ahead. Both will soon be growing rapidly (or intend to) but one is worried about too-rapid growth (China) while the other is aiming at much faster growth in the future (India).
To sort things out, and to obtain 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 better than what's been seen in the last two to three years." For a few historical perspective, Shroff remarked that India's growth rate acquired after the federal government adopted a policy of opening the economy in the early 90's. Since that time, 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 since the benchmark.
Shroff emphasized that why is India's growth distinctive from other emerging countries is that in large part it comes from domestic demand, not from exports or commodities. There's no large-scale overhaul that India has 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 as 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 are speaing frankly about businesses which are oriented toward profits and return on capital. This is not always the case elsewhere in Asia. Because of these conditions, India offers the investor to be able to purchase good quality companies with solid business models.
In terms of Matthews India, Shroff said that the fund does definitely not invest in the large cap, world-renowned companies (the Indian blue chips). As Shroff put it, in the event that 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 play the role of a bit more forward-looking. What the fund is searching for 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 perhaps five years from now."
The Indian market...We asked Mr. Shroff, what index one should watch to keep an eye on the Indian market. He answered that the Sensex is the standard index followed. But recently, the professional community pays more awareness of the S&P CNX Nifty Index.
In terms of valuations, the Indian market, says Shroff, is selling at a price-earnings ratio of approximately 15-16 times and at about 3 x 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 as little as 15% to as high as 45%. At this time he puts the premium at the reduced 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 to the internal sourced elements of India's growth so you get less volatility than you do from the "commodity producer."
That is not to say that the Indian market is not volatile. "Even although economy might be dancing to its 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 few three or four years the Indian market shows some correlation with the S&P 500." (We discover that recently to possess been true of emerging markets as a whole.)
Shroff looked to 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. Here is the same policy that people have been following with regard to the pure China funds. The policy isn't written in stone, but the world economy will have to be functioning closer to normalcy before we'd consider any relaxation.
After the interview with Shroff, we were much more convinced that the single-country India funds belong within our fund list. Not merely is India growing rapidly, but we expect you'll begin to see the emergence of more investment -- worthy companies as opportunities arise. Thinking about the potential, you can appreciate why Asia and the emerging markets, generally speaking, have grown to be the center of the investment world's attention.