The Case For India

August 22, 2018 - John Osbon (3 mins to read)

India has been getting favorable headlines this year because its prime minister is considered progressive and because its stock market is doing well. The Indian Sensex is up 430% since 2008. India is not exactly a favorite market yet but it has been doing better than many markets in the world. Is it time to invest? Time to hold on for the long term? Let’s look at some basic investment facts about India.

Population as power

The demographics of India are positive, more positive than China. The BBC projects that India’s population will be greater than China’s in 2024. China’s one-child policy has put it behind India for centuries to come. Younger, growing populations mean more workers, more aspirations, and more human capital. The country’s educational system for engineering and mathematics is legendary.

Rule of law

India adopted the English legal system for business in stages, first in 1872 with the Indian Contract Act and later in 1935 with the Government of India Act. The latest update is the Companies Act 2013.  Indian law is complex but headed in the right direction. By general agreement, both government and business want additional clarity and simplification regarding business in India. It’s likely to come in time as it benefits all parties. While not perfect, India is considered to be one of the better places to do business. Hence, the high number of both Indian and American companies with growing operations there.

Decades of growth

India is still a young country politically. It gained full independence in 1950. It was a socialist country until 1991. Since then democracy has taken root and blossomed.  After low growth until 1990, India has become one of the largest and fastest growing economies in the world. Growth this year will exceed 7% and is expected to be above China’s 6% growth rate for some time.

In the price for now

These three strong trends – population, law and growth – are already reflected in stock prices. The Sensex – India’s 30 biggest public companies – is hitting new highs above 38,000. The bad old days of Sensex 9000 during the financial crisis are long gone.

There are a few ways for US investors to invest in India now. Vanguard’s VWO, for example, has 11% in India, with the rest of the assets in China, Taiwan and other emerging markets. Only two direct investments in India pass our tests, one much more so than the other. So it’s not easy to load up on India right now. More avenues into India should be expected over time.

What about the rupee

Any emerging market investor has to contend with the effect of the local currency on returns. Almost always over the long term, the local currency will depreciate, reducing the returns of the dollar-based investor. The rupee is a good example of good news/bad news depreciation. Its purchasing power versus the US dollar has gone down 50% in 15 years. The good news is that Indian goods and services are 50% cheaper to buy. As long as the depreciator is increasing productivity then stock prices locally will go up. India has done exactly that.

India in your portfolio?

China is getting most of the headlines right now for political reasons. India will eventually get more of the world’s investment dollars in my opinion. The role of extra Indian investments in your portfolio depends mainly on two personal factors: patience and risk tolerance. Investors in India need patience as the country’s youngish international economy matures. Big gains are much more likely over decades than months. And like with any emerging market, investors must be tolerant of risk. India’s market is likely to experience significant volatility over the short term. Investors with large portfolios and long-term outlooks typically can stomach that volatility more easily.

Our bottom line: we haven’t increased our position but it’s something we’re considering.



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