Investing in Emerging Markets: INDIA
Anmol is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
India is the eleventh largest economy in the world and the third largest by purchasing power parity. India is also a member of the G-20 major economies of the world and is one of the fastest growing economies with a large and increasing workforce. India recorded the highest growth rates in the mid-2000’s and is also the 19th largest exported in the world and the 10th largest importer of goods. The buying power of the consumers along with its middle class is increasing rapidly, which in itself is a major reason to invest in Indian companies and benefit from the country's growth prospects. Investing in emerging markets will also diversify your portfolio if done correctly.
There are a large number of buyers with increasing buying power: India has a population of 1.22 billion which makes it a great market due to the large number of customers. The buying power of the Indian consumer has been increasing at a rapid rate.
The Cost of doing business: Labor costs in India are still low which vastly cuts down costs of the Businesses in India as they can charge higher prices but with lower cost of manufacturing while providing services.
Stability: India is one of the largest democracies and is one of the more stable countries in Asia.
Growth: India's economy is growing at a rapid rate which is much higher than other countries. Along with China, it is the best emerging market play in my opinion.
Risks to consider:
Slowing Growth Rate: One of the risks you may consider is that India's growth rate has somewhat slowed down in the last few quarters though it is still higher than many other countries. The slowdown in growth rate is primarily due to lack of reforms which its government expects to be corrected soon with the appointment of the new finance minister.
Slow / Lack of reforms: There is somewhat a disconnect in the parliament due to the coalition government and thus the ruling party isn't able to bring in reforms or pass new bills in fear of opposition, but once the political environment stablizes then the parliament expects to finally make a decision on the much awaited FDI in retail and FDI in aviation Bills which should provide the economy with the boost it needs.
Corruption: India is a pretty corrupt country and it is hard for business to get done without bribery, but Indian businesses are accustomed to it and are able to run and manage the businesses effectively. Though Foreign Corporations planning to operate in India may find this a challenge.
There are many legal procedures and tax issues which need to be addressed if investing directly into the Indian Exchanges thus you might want to take a look at the some of the Indian Companies listed on US exchanges. There are many Indian stocks listed on the US exchanges, you can take a look at the following companies I believe have strong ethics and market presence.
HDFC Bank (HDB) - Banking and Financial Services
ICICI Bank (IBN) - Banking and Financial Services
Dr.Reddy’s Laboratories (RDY) – Pharmaceutical Services and Products
Tata Motors (TTM) - Automobiles
Infosys (INFY) - Business consulting, technology, engineering and outsourcing services
To Avoid taxation and many other legal issues along with the ADR’s (American Depositary Receipts), Investors can look into investing in India’s many ETF’s Such as:
Emerging Global Shares Indxx India Small Cap ETF (NYSEMKT: SCIN) : It is a free float market cap weighted stock index comprised of a representative sample of 75 Indian companies that Indxx LLC determines to be the representative for small market cap companies in India ( YTD return 15.12% , Yield 1.32%)
PowerShares India Portfolio (NYSEMKT: PIN): This is a Diversified Stock Index which is designed to replicate the Indian Stock market as a whole, through 50 Indian stocks selected from a pool of the largest companies listed on two major Indian exchanges. (YTD return 6.50%, Yield 0.32%)
iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY): The index measures the performance of 50 large cap Indian stocks.( YTD return 11.26% , Yield 0.57%)
India Small Cap Index Profile (SCIF) :- The index provides exposure to publicly traded companies that are headquartered in India or that generate the majority of their revenues in India.( YTD return 17.98% , Yield 1.64%)
Other Ways to Invest Indirectly in India: - These are 2 US companies which I believe will grow rapidly in the long run as they are investing and starting operations in India and will benefit greatly from its growing consumer base.
1) Starbucks (NASDAQ: SBUX): - Starbucks got into an alliance with TATA to open Starbucks outlets in India. This has been announced way back but they didn’t actually get around opening any stores. However TATA plans to open several stores in India this year. Starbucks even though it’s not yet in India is very popular and consumers are aware of the brand and are anxiously waiting for it to open.
2)Dunkin Brands (NASDAQ: DNKN) :- The 3rd Dunkin Donuts store opened in India recently , and management plans to open many more in the near future, 3 of 3 stores are located in the capital of Delhi thus there is a lot of room to grow in the capital as well as Other cities of India.
As both Starbucks and Dunkin Donuts operate on a franchise model, both the brands will benefit from the royalties gained and will provide them with a recurring income stream. This would vastly improve their Bottom Lines, Plus both take the emerging market risk out of the equation since they operate worldwide and offer diversification in that regard, so it would be worth your while to take a closer look at them.
India’s booming economy along with its positive demographics make for a great emerging market play for growth and value seeking foreign investors. Investing in India faces fewer risks than many other emerging countries since as a whole its democracy is stable unlike other countries in Asia.
Investing in emerging markets if done correctly can really benefit any portfolio, though if done incorrectly can totally damage the portfolio. Thus It is strongly advised that you do your own further research and decide if the risk/reward ratio is for you.
Anmolsc has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend HDFC Bank and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.