May 3, 2014
Where to Invest in India
Investors should stay focused on key themes, including infrastructure and India's rising middle-class, in assembling an India portfolio. A quick guide to a sometimes volatile market.
Investors' feelings about Indian stocks tend toward the extremes of a Bollywood blockbuster, swinging between utter despair and unfettered euphoria. Sentiment hasn't quite reached giddiness, but let's call it happy and hopeful.
After pulling $7.8 billion out of Indian equities over the previous 12 months as economic growth slowed, global investors put money back into the market last month, according to the data researchers at EPFR Global. The S&P BSE Sensex, India's major stock index, fell 26% from the beginning of 2013 to an August low, in U.S. dollar terms. It has since rebounded 39%, hitting a record high in April; it's up 9% in 2014, aided by renewed interest from foreign investors. Goldman Sachs, for example, told clients in March that Indian equities merited an Overweight in global portfolios.
Drawing: Dan Picasso for Barron's
So where will these foreign funds go? If, as seems likely, Narendra Modi and his Bharatiya Janata Party (BJP) end up in power, investments in infrastructure to modernize India's inefficient transport system will rise, and businesses generally will be freed from bureaucratic entanglements (see cover story, "India: Open for Business"). Pushed by government spending and guided by Reserve Bank of India Governor Raghuram Rajan, the economy seems poised for a cyclical rebound that will aid India's rising consumer class. "It could be the start of a new bull cycle," says Nikhil Bhatnagar, vice president of South Asia equities at Auerbach Grayson. He thinks economic growth, which fell to 4.7% in 2013 -- about half of 2011's rate -- could rise to 6.5% by 2016, outpacing China's expansion.
Indian stocks tend to trade at higher valuations than those of other emerging markets, because of the depth of the markets and the large number of well-run companies. The Sensex trades at 14.7 times forward earnings, above the emerging-markets' overall average of 10 times but below its historical median of 17.
THERE ARE SEVERAL WAYS to play India's revival. For those who want broad exposure, there are a handful of suggested mutual and exchange-traded funds. The $463 million Matthews India (ticker: MINDX) returned an average of 17% a year over the last five years, topping its Morningstar category. Matthews India searches among companies of all sizes to find those that seem to have sustainable growth prospects. One of its key themes is Indians' rising income over time.
Then there's the WisdomTree India Earnings fund (EPI), which is the broadest and oldest ETF focused on India, and has a bigger helping of energy, consumer staples, and materials companies than its benchmark, the MSCI India index. The iShares India 50 ETF (INDY) tracks an index of 50 blue-chip Indian companies.
Investors also can find opportunities among large cyclical companies. Auerbach's Bhatnagar recommends infrastructure lender IDFC (IDFC.India), which would benefit from increased funding for modernization projects. Its shares trade at eight times forward earnings.
ICICI Bank (IBN), one of the country's largest private-sector banks, is a good proxy for the overall economy, particularly consumer borrowers, who will presumably do well as the economy regathers speed. ICICI trades at 13 times forward earnings.
Auto makers, which have been hurt by high inflation and sluggish demand, could rebound with the economy, says Richard Titherington, who oversees $48 billion in assets as chief investment officer for emerging market equities at JPMorgan Asset Management. Motorcycle maker Bajaj Auto (BJAUT.India), which trades near its long-term average at 14 times 2015 earnings, could gain a new generation of riders. Earnings could rise 11% a year over the next few years, he notes. Another favorite, Mahindra & Mahindra(MM.India), has been able to increase net income despite the stall in the economy. The stock trades at about 13 times 2015 earnings and should average 15% earnings growth over the next couple of years, Titherington says.
Matthews India lead manager Sunil Asnani says some reforms already are under way that could spur growth. For example, India is creating a dedicated freight corridor that tackles the country's dilapidated infrastructure. Shipping and logistics firm Gujarat Pipavav Port(GPPV.India) is one of Matthews India's holdings.
Following the recent run-up in the market, Asnani says he is finding more opportunities in small- and mid-size companies, which are more attractively priced than large-caps, based on their profit and growth prospects. The S&P BSE Small-Cap index, for example is still 46% below its January 2008 high, while the Sensex is setting records.
One possibility, Shriram Transport Finance (SRTR.India), the country's biggest commercial vehicle lender, trades at a discount and has a stronger balance sheet than many of its peers, according to David Nadel, manager of the Royce International Smaller-Companies fund. Nadel, who's been raising his Indian position in the last year, likes that Shriram's loan officers live in the same communities as their borrowers. He expects it to gain from economic growth, as well as increasing credit usage in a country where fewer than 20% of the citizenry have loans.
Goldman and the others realize that Indian stocks historically have rallied before elections, propelled in part by foreign investment. Sentiment could turn back toward despair if poll results take an unexpected turn or the pace of reforms is slower than anticipated. But even that could be short-lived. "History teaches you to be skeptical of the government's ability to deliver on the hype. We think the economy will do better anyway and think they have made the right monetary policy decisions that set the foundation for strong performance," says Titherington.
Any bouts of melodrama could offer opportunity.
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