While the Asian economy has grown in proportions and importance, we've been slowly adding the single-country funds specialized in Asian countries to the international funds list. The first country we added was Japan, and much later China. What we required in order to present you with the added threat of a fund specialized in a single country was a reasonably large and diversified capital market that offered a portfolio manager the chance to diversify the portfolio even inside a single country. Because the Japanese and Chinese economies grew and new industries blossomed, we thought that test was met. We now believe that the Indian economy and capital markets also meet our test. With this problem, then, we're adding three India funds to your list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We may add a couple of other funds to the list over the next few issues.
Why India?... Frequently previously 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 taking on separate identities. As we've been listening and reading on the span of the past 4 or 5 months, we attended to the conclusion that there are differences in the paths that China and India will undoubtedly be overpowering the months ahead. Both will undoubtedly be growing rapidly (or intend to) but one is concerned about too-rapid growth (China) while one other is aiming at even faster growth as time goes by (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 "a few of the days ahead for India (speaking of growth) might be a lot better than what has been seen in the last 2 to 3 years." For many historical perspective, Shroff remarked that India's growth rate acquired after the government adopted a policy of checking the economy in the early 90's. Since that time, as more reforms were gradually introduced, growth has acquired further. By 1995, India's growth hit the high single-digits range and remained there (on average). Such growth is currently taken since the benchmark.
Shroff emphasized that why is India's growth different 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 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 need to shrink being that they are unsustainable. India faces no such issues.
The 2nd 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're discussing businesses that are oriented toward profits and return on capital. This is simply not always the case elsewhere in Asia. Because of those conditions, India supplies the investor to be able to spend money on good quality companies with solid business models.
In terms of Matthews India, Shroff stated that the fund does not necessarily spend money on 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 realize that two-thirds of our portfolio is comprised of small- and mid-cap stocks. We act as a little 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 you ought to watch to record the Indian market. He answered that the Sen*** is the original index followed. But recently, the professional community pays more attention to the S&P CNX Nifty Index.
As for valuations, the Indian market, says Shroff, is selling at a price-earnings ratio of about 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 in comparison to its emerging market peers. The premium has ranged from as little as 15% to as high as 45%. Today he puts the premium at the low 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 use it, "is quite robust." Another reason refers back to the inner sourced elements of India's growth so you get less volatility than you do from the "commodity producer."
That's not saying that the Indian market isn't volatile. "Even although the economy might be dancing to a unique tune," Shroff warned, "when foreigners were pulling out money from all emerging markets in 2008, the Indian market went through a very severe correction. (In fact) in the last three or four years the Indian market shows some correlation with the S&P 500." (We realize that recently to own been true of emerging markets as a whole.)
Shroff turned to the issue of volatility a lot more than once. He was preaching to the converted. We're restricting our advice regarding the china fonds to Venturesome investors only. This is the same policy that individuals have now been following regarding the pure China funds. The policy is not written in stone, but the planet economy will have to be functioning closer to normal before we would consider any relaxation.
Following the interview with Shroff, we were much more convinced that the single-country India funds belong inside 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. Considering the potential, you are able to appreciate why Asia and the emerging markets, in general, are becoming the middle of the investment world's attention.