Investing in Emerging Markets: Three Reasons Why You Should Invest in India, Not China
by Karim Rahemtulla, Advisory Panelist
Friday, October 2, 2009: Issue #1107
India has come a long way since 1997.
The year marked my first trip to the country – and I remember it well, as I headed back to America with a resounding “sell” ringing in my ears with regard to India’s investments.
At that time, the market was clearly manipulated by several large traders. One in particular was Hershad Metha, referred to as the “Big Bull.” And bull is exactly what he fed to the masses, as he borrowed money from the government-owned banks and plowed the cash into the stock market. Result? The mother of all (fake) bull markets, created by a man with a choice word missing from the end of his nickname!
Knowing this, and the precarious position of investing in emerging markets at the time, I issued a “don’t touch with a 10-foot pole” rating on Indian stocks (shorting wasn’t an option at the time). The market crashed, as did most Asian markets.
Since then, however, every time I’ve returned, the profitable investment ideas I’ve picked up have more than paid for each trip. Right now I’m bullish on the technology sector – and in one company, in particular…
The Best Way to Invest in a Volatile Stock
The last time I visited India a year or so ago, I led a group of investors on a research trip to find the most profitable private and public companies.
It was clear the market was overheated, but there was still opportunity. We visited several public companies, but tech giant Infosys (Nasdaq: INFY) jumped out as leader of the pack.
But liking a company is one thing. Investing your hard-earned money in it is another.
As we’ve advised many times, the best way to invest in a volatile stock or market is to either do so in increments, or by using a strategy that mitigates risk while also providing a healthy upside.
Knowing that the market was ripe for a correction, we executed the covered call technique, where you sell call options against shares that you own in order to receive cash upfront, lower your original cost and reduce your downside.
Result? We ended up owning Infosys at around $30 per share (the stock currently trades around $48) – about 15 times earnings for a company growing its bottom line at twice that rate. And in January, our shares will be called away from us we’ll pocket a tidy gain.
So why India?
Three Reasons Why India Tops China’s Emerging Market
When you talk about emerging markets today, the “BRIC” nations immediately spring to mind – Brazil, Russia, India and China.
China tends to receive the most press within that quartet. But here’s why you should choose India instead…
- Better Protected: India’s economy is much more sheltered from the global financial contagion because it’s smaller, less reliant on export growth of goods and the central bank is much more conservative in its monetary policy. Unlike China, India isn’t in the position where it must produce goods and keep the factories running in order to please the populace. Instead, it is focused on developing the country by internal consumption. And a big part of that comes from…
- A Fast-Growing Technology Market: India exports what China cannot – technology services. So instead of running factories at full tilt, it has offices that service the fastest-growing sectors of global economies. In addition, technology actually performs better in a recession than the production of hard goods, since people use technology to make operations more efficient.
- An Authentic Market Rebound: And now for the meat of it when it comes to investing. While the Indian stock market has rebounded on a par with China’s over the past year, the rebound is absolute. That’s because it’s not stimulated in large part by government spending for make-work projects.
Don’t get me wrong… India does have its fair share of boondoggles, too. But in terms of safety for your emerging market dollars (as well as transparency), it’s ahead of the game.
And in addition to all this, India boasts a much freer currency, no language barrier, educational superiority and a long-standing democratic tradition.
So it is time to buy India now?
The Best Way to Invest in India’s Emerging Market
If you want exposure to India’s emerging market in your portfolio, stick with Infosys. But wait for a pullback to $35 before you buy. We’re expecting a pullback in both Indian and Chinese shares from a technical perspective.
But don’t just sit and wait. If you read my colleague Lee Lowell’s column from Tuesday, you’ll know there’s a way in which you can buy the stocks you want at the price you want… and get paid for it. You do it by selling put options.
For example, in this respect, you could sell for the INFY January 2010 $35 puts for $0.60 per contract. This means you’d receive $60 for each contract you sell ($0.60 multiplied by 100 shares in the contract = $60) – your money to keep, no matter what happens – and have the chance to buy INFY shares for $35 at options expiration.
(Note: This is just an example, not an actual recommendation.)
There’s no doubt that emerging markets will crash from time to time (hence why they’re called “emerging” markets – they’re raw and volatile). But in India, the landing will be softer and the recovery from the inevitable downturns will be as strong, if not stronger, than most emerging markets.
China, in particular, looks decidedly overheated at the moment, since its recovery hinges largely on what happens in the U.S. The best way to play China is by investing in its ETF – the iShares FTSE/Xinhua China 25 Index (NYSE: FXI), which tracks the price and yield performance of top Chinese shares.
Good investing,
Karim Rahemtulla
Related Investment U Articles:
- Investing in India: Up Close and Personal With the World’s Best Emerging Market
- Why the Indian Stock Market Is Booming – And How You Can Take Advantage
- China’s IT Services Industry Challenges India in Outsourcing
- Tata Motors & The Nano: Why “That Little Car in India” Is Loaded With Big Profits
- Euro or Not, Siemens is a Steal
13 Responses to “Investing in Emerging Markets: Three Reasons Why You Should Invest in India, Not China”
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Dubbed a "market maven" by CNBC, Karim Rahemtulla is one of the country's foremost specialists in options trading. As founder and editor of The Smart Cap Alert, he focuses his efforts on all aspects of options trading – LEAPS, put selling/covered calls and spreads. 
Good article. I was interested in China untill I found out that one of my neighbors is a former Chinese government auditor. She told me that everything is controlled by the government and it appears you cannot rely on anything you are told. So Chinese stocks appear to be at best speculative.
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Totally disagree!
No need to say, China is topping the whole world economic market, India is even at middle or low level of Asian countries such as Japan, Singapore, Hong Kong(now is part of China now), K…
There are lots of Chinese corporates list at U.S stock market as Badu, Sino…etc and most of them are Technology Co., I am surprise you don’t know, what you can say in your article is only indian co, as infosys, infosys…hehe, and for FXI you can have 25 to choose from, don’t you realize?
My feeling is if any people like utility stocks, they can take a look at Indian stocks in emerging countries, but better WATCH (NOT LISTEN) how is real life of most people there and their character…it’s about risk and your money, hehe.
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The article is absolutely intriguing. Wish I could go. Have a great time!
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The argument of India vis-a-vis China or other country is not about which is better developed.
The argument is which has higher potential to grow. And as far as India is concerned, it is definetly better-placed in terms of growth because the potential is humungous.
Indians have made a lot of money, and are still making so. And they till now didnt evenhave the basics. So this money will be used to meet these basics: better food, electronics, house, cars, etc.
This is driving the Indian economy and hence for investors it is a great opportunity to invest in the the right sectors and benefit from it,
It is not about China being better than India or vice-versa. It is about the better investment growth opportunity in the future.
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Karim’s Article “Three reasons to invest in India and not China” is a must read for those investing in BRIC. Those of us who worry about the emering markets volatility and crashes and wonder if it is artificial I suppose some of your questions are answered here.
GDP wise India investment outshines most other countries except China. However the shortcomings of China investments is also elaborated by Karim a nice article Karim. Keep it up.
Capt. Sanjay Mahadeshwar
B&N Best selling Author
Winner of Best Books Awards
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D/Sir,
I Read the comments of Mr Karim Rahmatulla. Actually we are Indians receiving good Economicts who will pick up our country so high, such as Dr Monmohan Singh, PM and Dr Montech Singh Allualia.Comments of Mr Rahmatulla are correct, I think Infoysis as well as Reliance Industries, TCS and some ten to fifteen companies are best in India.
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no doubt it is a good piece of information.india
should score in the long run ie in coming decades.
iam more bullish on indian currency than tne stock
market.swiss blocked money perphas starts knocking to indian shore where indian rupee will ttouch it is any body guess.
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HERSHAD MEHTA,REFFERED AS BIG BULL IN STORY WAS ACTIVE IN 1992 AND NOT 1997 AS MENTIONED.
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Thanks Karim for this post.
I fully agree with you, I see more upside potential in India rather than China. Service oriented Indian economy is main reason why India is one step ahead in current situation.
I have posted also similar article comparing outlook for BRIC markets at http://www.emergingindex.com/2009/06/bric-emerging-markets.html
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Interesting article but why only Infosys? Why not take a broad exposure to India through iPath India ETN?
http://www.ipathetn.com/INP-index-components.jsp
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Fascinating! Why am I not surprised that most of your fans are Indians? The fact is China has outperformed India in every single way in the last 30 years, in good times and bad times. While Chinese farmers are poor, they are not starving like Indians because of lack of Monsoon water. You get your hopes up because of a PREDICTION of higher GDP growth next year, why don’t we compare what has actually happened? How about actually catching up to China one day, or what you really should hope for, catching up to the West? I will bet you that the Chinese are not looking back to see if you are keeping pace with them.
India is a developing, like China, so naturally it has a lot of growing to do. Karim is right that investing in India is a good idea, however he should have done more research before comparing India with another country that he doesn’t appear to know much about. Did he forget to take a trip to China first?
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Dear Karim,
I bet may be wrong this time because of the following reasons:
(1) In the past,Chinese Government was very poor with no foreign currencies reserves.Even under this condition,the country still made some progress.Case in the point,we had our nuclear bomb in 1964 to defend our country.
(2) We have our racial spirit to upgrade our standards in all aspects.This is the hidden intangible impetus and most foreigners don’t understand.We work hard and smart.
(3) We do not have any language barrier within China.We are also diligent enough to upgrade our foreign languages especially the use of English.
We are confident that the language barrier will gradually be eliminated.Like myself,I learn English by myself,constant practice keeps improving my proficiency and fluency.The spirit drives me to do so.People in the West work only 5 days in a week.We work on every Sundays.Please don’t complain child labour because I am a guy close to sixty.
(4) The economic development we have right now comes from the development of some coastal cities,some cities along Pearl River Delta and the Yangzi River Delta only.The central part,the north western and south western parts are still under development.This will be the economic
impetus for developing our domestic market.
(5) As everybody knows,the buying power of the Dollars keeps deminishing,we currently use the Dollars to buy raw materials and commodities.When the economy picks up again with the depreciation of the Dollars,the buying power of our foreign reserve will be maintained.
(6) The Chinese parents have been willing to move heaven and earth to support their children to hvae the best education offered.
This is just off my head,so we are confident that we can maintain a comfortable edge over our competitors.
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I like Mr. Chan’s response. You can tell he’s worked hard to learn English, among other things. He is one of the few, even considering Americans, who correctly used a comma after an opening clause. (You have to admire Chan’s work ethic.) My brother is a business major and was in floor sales for years. Recently, he purchased a flooring company in China. I know him well enough to know that he would not have done this unless he felt very confident about the return after he’d done the research. (One of the things my brother specifically admired about the Chinese that he mentioned to me was their work ethic.) I know many Americans who can’t even be bothered to do a little homework.
Sincerely,
An English teacher
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