Investing

By Dr. Steve Sjuggerud

Quick, where's the LAST place you'd expect to meet three Ivy League-educated fund managers from India?

Let's see... The Vatican? Afghanistan? I don't know... But I met these three smart guys in a pretty unlikely place: on an island off the coast of Belize called Ambergris Caye. I was impressed with these fund managers from India. So much so that I must have been asking them too many questions about investing in India over dinner...

I asked them about how they analyze investment opportunities in India, how they run their investment fund management business, the Indian stock market and more. Usually, it only takes a few questions for me to sniff out "average" fund managers. But these guys were impressive.

So I kept going. (Too far, apparently... At a lull in the conversation, one of their wives asked, "What, no 21st question?")

I think that Rahul, the head analyst of their fund management company, Atyant Capital, is on to something. He has a competitive advantage... less competition.

You see, folks like you and me can't do foreign direct investments into India. Since it's difficult for foreign investors to invest there, most of us, frankly, don't bother with investment opportunities in India. And from there Rahul stretches his competitive advantage even farther... he specializes in smaller stocks, which have even less research competition than the big blue chip stocks.

How Investing in India Earns a 300% Return...in Less Than 3 Years

It's been working. Apparently, $1 million invested with Rahul in 2002 would be worth over $4 million today. Stocks have done well... Even so, Rahul said stocks he follows that were trading for 2-4 times earnings are now trading at 4-8 times earnings - still cheap.

But Rahul's advantages are our disadvantages. I haven't considered investing in India much, because as foreigners we only have a small range of choices to invest in. That said, it might be time to start looking at investment opportunities in India. Here's why...

Investment Opportunities in India? A Few of Rahul's Big Points and Considerations...

Quick - guess which two economies outside of the U.S. will be the world's largest in 30 years' time? Most people would start with China. And I'd venture to say that most people wouldn't believe that India's economy might be larger than Japan's or Germany's. But that's Goldman Sach's conclusion in its special report, "Dreaming with BRICs."

Sounds crazy that India would be more important than Japan. But it's easy to understand. Japan and Germany are stagnant growers with older populations. And India is a fast grower starting from a very low base, with a very young population, which will open up considerable investment opportunities in India. By 2040, China will be larger than the U.S. And by 2060, India may be larger than the U.S. (extrapolating trends from the Goldman Sach's report).



The demographics (India's young population) were one of Rahul's big points. The difference between China and India is huge...

Rahul says 25% of people in the world under the age of 25 are in India, and a full 80% of the population is under 45 years old. That spells good news for investing in India in the future because an old population becomes a major drag on economic growth.

We are discovering that the hard way in the States with our Social Security crisis--that there won't be enough working-age people to pay Social Security for our retirees.

Looking down the road, China is in more trouble than America. According to The Economist on March 3, 2005: "China is aging faster than any other country in history. It is unique in growing old before it has grown rich." Why? It's simple. By introducing its "one-child" policy in 1980, China in essence cut off the future number of young workers to support its aging population. This creates an "instant" problem... that will appear in a few decades.

Another of Rahul's points was that you haven't missed the gains yet.

"There's Still Time to Profit from India Investments"

While Indian stocks have done well lately, they've basically been in a trading range for the last dozen years (as long as MSCI has been tracking Indian stock market data in U.S. dollar terms). You're still able to buy today at not much above the 1994 highs.

For comparison, in the U.S. the Dow Jones Industrial average was below 4,000 in 1994, and it's above 10,500 today.

So why have Indian stocks as a group not gone anywhere? It might be because India has played second fiddle to China. The Economist said it best on March 3 of this year: "If this is a race, India has already been lapped."

But the time to buy stocks is when expectations are low, not high. And while expectations are high in China, not nearly as many folks have invested in India.

Unfortunately, as foreigners, our investing choices in India are not cheap, at first glance.

I put together a list of the stocks that we can easily buy below... the major Indian stocks that trade on the U.S. stock exchanges. Of course, not being an expert in any of these, I'd likely consider them only if they were trading at a forward P/E of less than 10. None of these are even close:



* INF OSYS
* WIPRO
* ICICI BANK
* HDFC BANK
* SATYAM COMPUTER SERVICES
* TATA MOTORS
* MAHANAGAR TELEPHONE
* DR REDDY'S LABORATORIES
* VIDESH SANCHAR NIGAM

Our other alternatives are two India funds: The India Fund (IFN), and the Morgan Stanley India Investment Fund (IIF). Unfortunately, these two funds have a generous helping of the relatively expensive stocks listed above in their portfolios.

India may surprise the world with its economic growth over the next few decades, and those investing in India may be rewarded. And China, with its high expectations, may disappoint.

The problem for you and me as foreigners is, investing in India means our choices are limited to the blue chips above that appear expensive at first glance.

If a stock market crash hits India in the next few years, then it'll really be the time to buy, as the demographic story isn't changing.

About the Author

Dr. Steve Sjuggerud is editor of the free, twice-weekly Investment U Newsletter, and serves as Chairman of IU and the Oxford Club's Investment University. Steve helps people become better investors with actionable investment advice, including the ( http://www.investmentu.com/IUEL/2005/20050322.html ) Investing in India report above.