Investing in India

Investing in India: Two In-Favor Sectors And Why It’s Not Quite Time To Buy

by Karim Rahemtulla, Chairman, Mt. Vernon Research
Monday, June 12, 2006: Issue #545

Editor’s Note: International stocks have experienced a sharp correction of late. And India is no exception – its benchmark index, the Sensex, has dropped more than 30% since mid May. Still, there’s a lot of talk about India’s growth prospects. Karim Rahemtulla, Chairman of Mt. Vernon Research and former Oxford Club Investment Director, recently led an investment fact-finding trip to India And amid some broad skepticism, his research has uncovered two potential sectors for long-term profits. Below is his initial follow-up report. Please note that portions of this article were previously published in the Smart Options Report on March 1, 2006.

India’s “economy,” it’s been said, is roaring. (The recent correction in the Sensex might be changing a few minds.) But I recently traveled to the country to see firsthand just how big its economy’s blaze really is…

My colleagues at the Daily Reckoning (a highly-regarded online financial newsletter) sent me a message from one of their readers. He questioned the wisdom behind “sending” me to India, since I never had anything good to say about the country.

Indeed, after my three-week tour of the country, I concluded that I would not risk a dime investing in India at least, not yet

One Billion Reasons To Be Bullish on India?

When I returned to the States, I attended a major investment conference where I shared my skeptical view on India. The next speaker was less wary. As an emerging market specialist, he was bullish on India. “How could you go wrong with a country that boasted a billion people?” he said.

After his speech, we talked and he scoffed at my skepticism about the country – the lack of infrastructure, the grinding poverty, widespread corruption, the continued negative imprint of the caste system and lackluster leadership. India would be the next powerhouse of Asia, he claimed. I was confused. Not about whether I would invest in India, but rather, what he had seen there that made him so positive.

He mentioned the strong monetary inflows, including mutual funds, and the move in stock prices. At the time, the Indian stock market had half the market capitalization of Microsoft.

I asked him about what he made of life on the street. He paused, and then said he had actually never been to India!

On my recent trip there, I saw improvement.

The top 10% of wage earners are now enjoying a standard of living comparable to the United States in the 1950s.
Two-wage-earner families have become commonplace.
The introduction of credit has blossomed, as has the greater supply of Western goods.

In a sense, India’s economy is undergoing a renaissance. Just take a look at “Silicon Valley” in Bangalore and you’ll be amazed at the sprouting number of nightclubs and Western coffee shops.

Investing in India: Two Promising Plays

I do like a couple of sectors in India; namely, investing in infrastructure and air transportation.

The country will spend billions in the coming years on roads and air transportation. And Indians love to travel. The airport in Delhi, a city inhabited by 15 million (of which about 2 million can afford to travel by plane) has a terminal building and infrastructure more appropriate for a city the size of Albany. Mumbai is not much better. Planes are packed and delays are common. Competition is beginning to heat up.

But even if you want to invest in these sectors in India, guess what? As a foreigner, you are limited to investing in India in a mutual fund or one of the 11 ADRs listed in New York. You could invest in the local market, but only through a proxy. So, for all intents and purposes, unless you want to invest in the IT sector, you are shut out.

India is still an enigma. It has huge potential but it is still stuck in the past. The vast majority of the population cannot live on less than $100 per month, and continue to live without access to purified water, health care or decent housing. So, if you are willing to invest in a country in which only 10% of the people are going to work for your investment, then look to India for growth.

Here’s what’s changed in India in a decade:

About 100 million people have credit cards.
Disposable income is up.
The chance of having a “Western” lifestyle has improved.

But here’s the bad news: More than 1 billion people are still dependent on the services of a broken welfare system. When that shows signs of true reform, I will be the first to jump on the investment train.

Good investing,

Karim

Today’s Investment U Crib Sheet

As you know, all of the major indexes have been trending down lately. While it’s been a tuff market to make money in stocks, the options market has been terrific, where higher volatility is always welcome. In fact, members of my LEAPS Trader cashed in a 48% gain this afternoon on the Chicago Board Options Exchange Volatility Index (^VIX). We were in the position for one month. Learn more about this service here.

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