August 15, 2011 – Use the Melt Down to Load Up on India

Featured Trades: (USE THE MELT DOWN TO LOAD UP ON INDIA),
(EEM), (PIN), (INDY), (EPI)


2) Use the Melt Down to Load Up on India. Take a look at the chart for the emerging market ETF (EEM) below and you will be surprised to see how well it has held up in the recent collapse. This is in sharp contrast to its performance during the 2008 crash, when emerging markets outperformed developed markets to the downside by a factor of two or three.

So I thought it would be useful to spend some time with Sunil Asnani, portfolio manager at Matthews International Capital Management in San Francisco. He argues that you want to buy these markets during periods of market instability. Historically, they take the biggest hits, but then bounce back the hardest. For example, the India market (PIN) roared back 250% after the 2008 melt down, versus only a 104% move for the S&P 500. This is what you would expect for an economy that has grown 6%-7% a year for the past two decades, nearly double the American rate.

Asnani addresses the opportunities in India from a unique perspective in that before obtaining his advanced degrees, he was the Superintendent of the Kerala Police Department. He believes that India’s growth can accelerate from this level. India is first and foremost an infrastructure play. The massive capital investment program that China is now completing is only just getting started in India. Spend six hours a day between meetings in Mumbai traffic jams, and you can understand the need. Another round of reforms and deregulation is poised to unleash India’s incredible entrepreneurial culture. It also is carving out an important niche at the bottom end of the global car market.

India is on the verge of becoming the next China. Runaway wage increases of 20% a year for trained staff are rapidly pricing the middle Kingdom out of labor intensive industries. The bill will also start to come due for China’s 30 year old ‘one child’ policy in about five years, which will create massive demographic headwinds for further growth. India, on the other hand, has one of the world’s most enticing demographic pyramids, and will remain a young country for decades to come. That brings an ever rising tide of customers. At $3,500 per annum, India’s per capita GDP is only half of China’s.

The Mumbai stock exchange has 5,000 listed stocks, but liquidity is poor and short selling is rare. While countless hours spent on the phone with tech support in Bangalore might convince you this is first and foremost a software country, it only accounts for 5% of GDP and 1% of the workforce.

The world’s largest democracy does have its weaknesses. Some 70% of its oil is imported, so any sharp rise in the price of crude has a huge negative impact on the economy. Asnani reckons that each $10 increase in the price of oil chops 30 basis points a year off of GDP growth. Only 2% of the population pays taxes, creating perennial budget deficits. While the country’s higher education is world class, elementary education is backward. Perhaps 50% of the rural population is unable to read or write. Inflation, now officially at 8%, but realistically probably over 12%, is a constant risk.

Many of these price increases are tied to the rising price of food. India has one of the world’s most primitive agricultural sectors. Its productivity here is 1/3 of China’s and 1/5 that of the US, thanks to ancient land holding practices, primitive technology, and a backward distribution system. One third of India’s food production perishes to rot and rats before it reaches the end consumer.

Talking to strategists at the major hedge funds, India is where they are happiest making their 20 year bets. So you might want to take a look at the leading India ETF’s, (PIN), (INDY), and (EPI).

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