What we required in order to present you with the added threat of a fund focused on a single country was a reasonably large and diversified capital market that offered a portfolio manager the chance to diversify the portfolio even within a single country regarding etf japan. As the Japanese and Chinese economies grew and new industries blossomed, we thought that test was met. We now think that the Indian economy and capital markets also meet our test. With this issue, then, we're adding three India funds to our list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We may add 1 or 2 other funds to the list over another few issues.
Why India?... Frequently previously when 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 both are taking on separate identities. As we have been listening and reading within the span of days gone by four to five months, we came to in conclusion that 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 concerned about too-rapid growth (China) while one 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 very first point that Shroff made is that "a few of the days ahead for India (speaking of growth) may be much better than what has been seen in the last two to three years." For some historical perspective, Shroff remarked that India's growth rate picked up after the us government adopted a policy of checking the economy in the early 90's. Ever 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 since the benchmark.
Shroff emphasized that why is India's growth different from other emerging countries is that in large part it originates from domestic demand, not from exports or commodities. There is 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 will have to shrink because they are unsustainable. India faces no such issues.
The second point advanced by Shroff is that the private sector accounts for roughly 80% of India's growth. The significance of that is that in India we are referring to businesses that are oriented toward profits and return on capital. This is not always the case elsewhere in Asia. Because of the conditions, India provides the investor a chance to invest in high quality companies with solid business models.
In terms of Matthews India, Shroff said that the fund does definitely 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'll notice that two-thirds of our portfolio is made up of small- and mid-cap stocks. We play the role of a little more forward-looking. What the fund is looking for are those (smaller) companies that are "participating in the country's growth and have the potential to become one of many larger companies two, three or even five years from now."
The Indian market...We asked Mr. Shroff, what index you need to watch to record the Indian market. He answered that the Sensex is the traditional index followed. But in recent times, 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 three times book value. That is slightly above historical average valuations. Also Shroff noticed 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 is some justification for the premium, he added. The return on equity for Indian firms is in the 18-20% range, which, as he use it, "is quite robust." Another reason refers back again to the inner sourced elements of India's growth so you get less volatility than you do from a "commodity producer."
That's not saying that the Indian market isn't volatile. "Even although the economy might be dancing to its own tune," Shroff warned, "when foreigners were taking out money from all emerging markets in 2008, the Indian market went through a very severe correction. (In fact) within the last few 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 issue 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. This is actually the same policy that people have already been following regarding the pure China funds. The policy isn't written in stone, but the planet economy would need to be functioning closer on track before we would consider any relaxation.
After the interview with Shroff, we were even more convinced that the single-country India funds belong in our fund list. Not only is India growing rapidly, but we be prepared to see the emergence of more investment -- worthy companies as opportunities arise. Thinking about the potential, you are able to appreciate why Asia and the emerging markets, generally speaking, have grown to be the center of the investment world's attention.