“I” is for India
India is the “I “in BRIC countries and is the world’s fourth-largest economy. Lacking the natural resources of other emerging markets, India’s wealth is in human capital, specifically its educated workforce. This English speaking democracy will be the world’s most populous country by 2034 with some 1.6 billion people. There is dire poverty, to be sure, and a huge percentage of India’s children do not have enough to eat, yet at the same time, India has a middle class larger than the entire population of the U.S. This year Indians are expected to purchase 150,000 automobiles and 72 million cell phones.
India’s stock market gained 47% last year and after sputtering in the early months of 2007 is now performing well. Economic growth is expected to be 7% to 8% annually for the next few years. Inflation and interest rate concerns are slowing, and the rupee is rising. The Reserve Bank of India has not intervened in the currency markets, and most likely, interest rates have already peaked.
India’s bureaucracy can present obstacles, however. For example, regulations protect very small accounting firms and prohibit local firms from joining major international accounting networks. Knowledgeable accounting firms are necessary for transparency in business.
Weather and seasons play an important part in India’s economics. Currently a seasonal monsoon has been forecast, meaning that the amount of rainfall across India will be normal this year. For most Indian IT companies, the quarter ending in March is the often the weakest, mainly because of annual wage hikes. The last two quarters of the year are usually the best.
There are ample opportunities for participating in India’s progress. Besides individual stocks, there is an index funds, closed-end funds and open-ended mutual funds.
The iPath MSCI India Index ETN (INP) uses derivatives to mirror returns of the 68-stock MSCI India Total Return Index. The fund currently trades at a 0.15% discount and shows a gain of 24.66% since its inception in December of 2006. Over 26% of its assets are in Infosys Technologies Ltd. and Reliance Industries Limited.
Two closed-end funds exist so far. Both hold such Indian companies as Infosys Technologies, Bharti Airtel, Ltd. and ICICI Bank, Ltd., and both have impressive track records.
IIF - Morgan Stanley India Investment Fund is a closed-end fund that invests at least 65% of its assets in equity securities issued in India and may invest up to 25% of its assets in unlisted equity securities of Indian issuers. Its share price gained 25% over the year ending June 30 with gains of just over 60% in net asset value during that same period. It currently trades at a discount of 10.28%
IFN - Blackstone India Fund, another closed-end fund, was developed in 1994. It invests 80% of its assets in Indian companies and has had an average annual return of nearly 40% the past five years, beating the EAFE Index. It has a current yield is 7.44% annualized, but distributions are irregular. It now trades at a 13.40% discount.
There are also two mutual funds: ETGIX - Eaton Vance Greater India Fund and MINDX - Matthews India Fund. The Eaton Vance fund holds 38 large cap stocks, with an emphasis on industrial companies, and has an annual turnover of 67%. The fund has existed for 13 years and has returned an average of 43.27% annually over the past three years and 38.05% over the past five. Annual expenses are 2.14%. The Matthews fund divides assets evenly among small- and mid- and big-cap stocks. It holds 47 stocks with a 22% turnover. Its annual expenses are 1.41%. Both funds have 15% of their assets in tech stocks.
Note: Mutual funds are sometimes called open-ended funds because the number of shares varies. Throughout the day they trade at one price which is the net asset value (NAV) of its holdings at market close of the previous day. Unlike mutual funds, closed-end funds (CEFs) have a fixed number of shares and trade throughout the day like stocks. CEF prices are determined by supply and demand rather than by the net asset values of their holdings, so they can trade above their NAV (at a premium) or below their NAV (at a discount).