India's opportunities for shrewd investors
With uncertainty dominating the news, many investors are probably wondering what they should do next.
With the benefit of hindsight, the answer to that question is usually "invest". We all tell ourselves that we want to buy low and sell high, but in practice, few of us have been able to do so. It is all too easy to wait until there is not a dark cloud in the sky and shares have recovered to comforting new highs, but by then it is often too late. It is interesting to see that household name investors such as Warren Buffett are buying equities at prices that he has described as "on sale".
Indian equities have performed poorly this year as investors have become risk-averse. This is hardly a new phenomenon. During the past decade, there have been four occasions when the Indian stock market has fallen by more than 20 per cent. As scary as these occasions must have felt at the time, brave investors were handsomely rewarded, with the average return over the next two years being an astonishing 120 per cent.
Few would doubt that India has some powerful advantages. I would describe investing in such vibrant economies as "riding the up escalator". I believe that this metaphor contrasts with the difficulties that will be faced in the West, where companies are going to be "running up the down escalator" for many years to come.
There will be companies that prosper in the West just as there will be those that fail in India, despite the obvious advantages surrounding them. However, on balance, we would rather invest in companies that are being carried along by strong growth trends rather than have to fight against headwinds.
India's growth rate has actually been accelerating over the past half century. India's economy has grown at 4 to 5 per cent for decades, and growth has regularly topped 8 per cent over the past decade. So strong has growth been that India has suffered a dose of inflation. The Reserve Bank of India should be praised for moving swiftly to contain this with 11 rate increases in quick succession that now appear to be cooling the economy.
Stock market historians will know that the end of the rate cycle is often a great time for investors to begin accumulating shares.
There are compelling reasons to believe that the gap between India and the rest of the world will continue to expand exponentially. At the most basic level, economic growth can come either from an expanding population producing and consuming more goods or from a static population consuming ever more goods (or a bit of both). The West has collectively decided to borrow vast sums in the past to allow its populations to consume at the expense of consuming in the future.
In India, the situation is completely different. India has a population of more than 1 billion people already, most of whom have a long list of things that they don't yet own. This provides Indian companies with a massive marketplace for decades to come. Maruti Suzukiwas selling 120,000 cars per year in 2004. Today it is selling more than this every month and still has huge order backlogs.
The population is growing by about 10 million each year. The average age of India's population is just 25, with decades of consuming and saving ahead. If a company can simply keep pace with such population growth, this will give it more than enough growth opportunities without needing to expand market share or innovate.
All of this is helped by the fact that India carries much lower debt levels than the West, and therefore more money can be driven into consumption and investment rather than debt repayment. Infrastructure stocks such as Larsen & Toubro have already benefited from 200-fold growth in their value, but there is every reason to believe that there is more to come.
Accessing this growth has historically been difficult for many investors based in the UAE. It is practically impossible for foreigners to buy Indian shares directly. Even for non-resident Indians, buying shares directly will be burdensome. You will have to set up brokerage accounts, research companies that you wish to buy, then follow the news flow from your chosen companies to identify the right time to sell. Most investors eventually come to the view that they should hand over the day-to-day responsibility to a professional fund manager.
Another compelling reason to invest in the Indian market is the weakness of its currency. The worsening global outlook has reduced foreign institutional investment in India, thereby the supply of US dollars in the country. This, along with other reasons such as a rising current-account deficit and inflation led to a fall in the rupee's value to its lowest level since May 2009. In my opinion, interest rates and growth differentials, the Reserve Bank of India's efforts to control inflation and an increase in foreign institutional investment inflow will result in appreciation of the rupee over time.
Alan Durrant is the group chief investment officer and general manager of the asset management group at National Bank of Abu Dhabi. The views expressed are his own and not those of the bank
Published: October 18, 2011 04:00 AM