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India rises far above the BRIC pile, lures investors

Special to The Globe and Mail


Date: March 10, 2015

These are challenging times for most of the world’s largest developing countries. Russia is reeling from low oil prices and Western sanctions, China is struggling to maintain robust growth, and Brazil’s expansion has stalled as public spending soars.

Then there is India.

India has grabbed headlines this year with growth forecasts that exceed China’s. It has a new government committed to reform – including overhauling taxation, labour and foreign investing laws. And the central bank governor has won global respect during the past 18 months for wrestling inflation under control and stabilizing the currency.

Foreign capital is pouring into Indian stocks at a faster rate than any other major Asian economy after Taiwan. The benchmark S&P BSE Sensex Index has risen 7 per cent this year and 40 per cent over the past 12 months. Stocks in the index trade at an average 16.5 times projected 12-month earnings. That compares with a 17.7 multiple for S&P 500 stocks.

While money managers agree that some stock prices on the Sensex may be getting ahead of themselves, the consensus is that India should offer long-term gains to investors who can stomach the risk.

“We expect India to be a relative outperformer among emerging markets in 2015,” says Tushar Poddar, chief India economist of global investment research at Goldman Sachs.

Mr. Poddar cites three key drivers for India.

First, falling commodities prices, combined with central banks’ low interest rate policies around the world, are acting as a tailwind for the economy. India imports almost 80 per cent of its energy, and the 40-per-cent drop in the price of crude since last September has proved a windfall for companies and the government.

Some analysts estimate that a $10 (U.S.) drop in the price of a barrel of oil lifts India’s growth rate by as much as 0.5 per cent.

Second, the “cyclical upturn” that has already begun in the country is getting additional support from the Reserve Bank of India’s surprise decision to cut interest rates twice this year, Mr. Poddar says.

Third, Prime Minister Narendra Modi, elected in a landslide last May, has begun to implement structural reforms that should help boost sentiment and growth, he says.

Mr. Modi’s willingness and ability to drive radical change remain the biggest risk for foreign investors. The government’s budget, released at the end of February, has won international praise for moving the economy in the right direction, albeit slowly.

Among the key announcements, the government pledged to keep the deficit at 4.1 per cent of GDP but delayed its goal of moving to 3 per cent of GDP until 2017-18. It proposed a harmonized goods-and-services tax and said it would cut the corporate tax rate to 25 per cent, from 30 per cent, over four years.

The government has also agreed to give the central bank greater independence and to make price stability its principal job. RBI governor Raghuram Rajan has already driven inflation down to 5 per cent, from an average of 9 per cent during the past two years. Meanwhile more predictable rates and currency, combined with some improvement in governance processes, are raising the confidence of foreign investors.

The budget will also boost government spending on infrastructure and include measures to increase investment and financing in the private sector, which is good news for companies, analysts at Moody’s Investors Service say. But India’s banks are in for a shakeup as the government reduced the amount of public funds for recapitalizing banks, forcing them to turn to investors to raise capital to meet new international requirements, says Srikanth Vadlamani, a senior credit officer and vice present at Moody’s.

Foreign investors own about 20 per cent of India’s stock market, and local investors with large savings are increasingly growing confident enough to venture in. But to keep prices rising, India is going to have to remove barriers to foreign investment and improve access to good education, says Mark Mobius, executive chair of Franklin Templeton’s emerging markets group.

“In our view, what India needs is reform, plain and simple: less corruption and more action,” he says.

“India has a great talent pool and has made significant achievements in the areas of technology, engineering and medicines. It was being held back by bureaucracy, high global costs of commodities, as well as lack of clear title rights,” Mr. Mobius adds. “Many of these factors are changing to enable faster growth.”

Canadians considering an investment in India have several options. They can turn to a large mutual fund company that has the global-research resources necessary to support emerging market funds.

The Franklin Templeton Investments’ Emerging Markets Fund, for example, has 11.2 per cent of its assets in India, second only to an 18.6-per-cent stake in China. The fund’s biggest holdings are in the financial, consumer staples and IT sectors. As of Jan. 31, it had returned 14.4 per cent over the previous year and 3.3 per cent over the previous three years, after fees of 2.9 per cent.

The Templeton BRIC Corporate Class Fund has a slightly higher exposure to India, at 16.3 per cent of holdings. China accounts for 52.5 per cent of the fund and Brazil, 24.8 per cent. The fund posted a 5.8-per-cent return for the 12 months ended Jan. 31 and a loss of 1.4 per cent over three years, after fees of 2.9 per cent.

To get a more direct play on India, investors might consider an exchange-traded fund.

The iShares MSCI India ETF (INDA) is the largest fund in this space with more than $3.1-billion in total assets. It tracks 65 large and mid-cap India-based companies and charges an expense ratio of 0.68 per cent. The fund has gained 37 per cent over the past 52 weeks and is up more than 11 per cent in 2015. In comparison, the much broader-based iShares MSCI Emerging Markets Index ETF has gained only 1.6 per cent this year.

A third option is to invest directly in Indian companies that trade on U.S. exchanges. For example, two infrastructure stocks are Larsen & Toubro Ltd. (LTOUF.OTC), an engineering and construction firm, and Reliance Industrial Infrastructure Ltd. (RIIL.NS), which builds roads and distributes power.

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