Indian Investments Up or Down


Indian investments may not be the same for awhile

I am sending this note because our study of multi currency portfolios have shown that after global investment markets tank, as they have these last two months, emerging equity markets are the first and strongest in recovery.

This may not be the case now for several fundamental reasons.

For the past three years, Indian and Chinese investments have been big winners. They have been the back bone of performance in the Emerging Multi Currency Portfolio we created and track with Jyske Bank.

That Emerging Market Portfolio has performed astoundingly well, up 114% in 2006. Up 122% in 2007.

Of course that portfolio has been slaughtered in 2008. In our last update from November 2007 to January 21, 2008 the Emerging Market Portfolio was down 36.78%.

Surprisingly this was the second best performer of all six portfolios.

Portfolios 2008 Nov 16 Dec 14 Jan 13 Jan 21
Infrastructure -16.46% -20.97% – 7.28% -68.47%
Emerging Market -13.33% – 9.80% – 8.72% -36.78%
Danish Health -13.32% -32.51% – 8.72% -61.62%
Green -10.86% -14.31% + 9.96% -54.29%
$ Short Non – 5.26% – 9.08% – 7.39% -15.42%
Blue Chip – 2.78% – 5.14% – 3.41% -37.68%

Only the non leveraged portfolio did better and it is interesting to note that the emerging market portfolio performed better than the blue chip portfolio.

This would seem to favor emerging markets yet again.

Yet while all the other investments in that portfolio crashed, the Jyske Invest Indian Equity Fund did reasonably well and actually rose from $420 a share to $450.

Jyske Invest explains this phenomenon in its current review of India ’s prospects when it said:

“Strong growth and ample cash will probably keep up interest in Indian equities. Uncertainty about global growth may increase interest in Indian equities, which are not very dependent on global growth.”

In other words Indian equities are attractive right now because India is not so involved in exporting to the rest of the world. This may be good short term…but this is a problem in the bigger view which is one reason we should exercise caution now.

First, before we look at India ’s potential economic glitch, keep in mind that Emerging Markets had their fifth consecutive year with double-digit returns.

Emerging markets are catching up- with the industrialized world.

2007 was the seventh calendar year in a row in which Emerging Markets have outperformed the developed markets by a huge margin. In 2007 the Emerging Markets benchmark gained 39.4 % in US dollars. This to a total annual return of 9 % for the MSCI World Index of the developed markets in the same period.

Over the last seven years ending in December 2007, the Emerging Markets index rose 341 % in US dollars compared to 45.8% rise in the Major Markets Index.

India has been rising along with this trend.

Yet let’s also not forget a fundamental maxim about equity investments: “All periods of high growth are followed by periods of low growth.” This is a reflection of the universal nature of ups and downs.

So the seven year spurt of emerging market catch-up could slow down. And India would likely feel that pinch as will most emerging markets.

Yet there is more about Indian economics that could concern us.

Allen Greenspan summed up India ’s difficulties in his book “The Age of Turbulence” saying: “Perhaps more than any other major countries addressed in this book, India symbolizes most powerfully both the productiveness of market capitalism and the stagnation of socialism.”

Here is India ’s crunch.

India has leapfrogged past the 20th Century cheap labor intensive export phase used in most Asian countries. India jumped directly into 21st Century high tech global services.

So you don’t find yourself buying many shoes, TVs, computers and cars manufactured in India .

You do however often talk to an Indian when you make an airplane reservation or talk to a technician about a hiccup with your SE Asian built computer or have new software done.

Total employment in India ’s information technology industry has grown dramatically to as much as four and a half million people. This is great except this is barely 1% of the country’s employment.

The type of growth India has excelled at is beyond far too many of the terribly poor in India , who cannot compete and cannot become a part of this modern world.

They could come off the farm and work in a factory. They could raise their income from $30 a month to $150 or even more.

They cannot pick up the telephone…speak in English…and operate a computer. This monstrous bulk of poor were left behind in the leap.

On top of this India also has one of the world’s worst bureaucracies that infiltrates almost every segment of Indian industry. Tough labor laws hobble job creation. It is so difficult to fire an Indian employee that no one hires. Poor internal transport further inhibits the large manufacturing capacity that the country needs.

This has tended to isolate most of India from the rest of world. This isolation may have helped Indian shares for the last few months but it’s truly a bad thing when the key to growth is increased global trade.

India’s economy was equal to China ’s 15 years ago. Today it is only 40% of China ’s size. Though the economy is huge and growing when looked at in terms of production per person it is below Cote d’Ivoire and Lesotho .

This has divided India , turning a few cities like Delhi and Bangalore and Mumbai into modern metropolises with a growing, wealthy middle class. Yet elsewhere especially in rural India the population is mired in one of the world’s most bleak levels of poverty.

This isolation also leaves India out of it. By this I mean that the manufacturing and service sector are protected in India which is fine but when they run into the buss saw of global competition they cannot compete.

For example a reader from Australia just sent me this note:

“Dear Gary, Just returned from a business trip to India and Hong Kong . Just a word of warning to your readers. Do not fly Air India . It seems that whenever I have to fly with them there are always some kind of problem. Well this one takes the cake. Went to check in at New Delhi . Get to the counter. No! you can not fly as you do not have a ticket. I have never had this happen before. It seems that the last domestic flight had taken the coupon out by mistake. So they tell me to go out of the airport. But you can’t leave the airport as you can only come into the airport if you are flying out. So after finding this out you need someone from Air India to go with you and talk to security. Air India could not care if you made the flight or not. Once on board the flight from New Delhi to Hong Kong is appalling, toilets not cleaned, plane extremely old. There was even foil holding some of the fixtures together in the bathrooms. Makes you wonder what holds the engines together. Flew back to Sydney today with Qantas. Its like a Rolls Royce to a beat up VW. As I said do not fly with Air India .”

I appreciate that we can all catch any airline at a bad time. Yet this story rings a little too true.

In the short term India may do well. Jyske Invest’s recent review says:

“The year closed with fair price rises for Indian equities. They outperformed most emerging markets and the other regional equity markets in Asia . Strong indicators of growth and plenty of cash in the market will probably keep interest in Indian equities keen, particularly in view of the mounting concern over global growth. Foreign investors were net buyers to the tune of USD 1.2bn; in November they accounted for a net sale of USD 1.1bn. Also local funds were net buyers of equities, to the tune of USD 850m in December.

“Growth in industrial production came to 11.8% in October, partly due to a low basis of comparison, partly to strong export growth and heavy demand in connection with a number of public holidays. Growth in the manufacturing industry rose to 13.3% from 7.7% in September. For capital goods, the growth rate was 20.5%. We expect to focus on this sector.

“Outlook

“Economic growth is strong and structural changes will continue to drive consumer spending and investment. In view of next year’s elections, it is very likely that the Indian budget will focus on additional investment, which will help to push up both investments and consumption. We intend to continue to focus on shares that benefit from growing investments and domestic consumption.”

So this may be an early warning.

There is one other reason why we should have caution about Indian equities now. They are bad value according to Michael Keppler who ranks India and China on his sell list.

Here are the Keppler bad value emerging markets as of his last analysis that you can read at

http://www.garyascott.com/2008/01/23/1967.html

SELL CANDIDATES (Low Value) China , Egypt , India , Indonesia , Morocco ,.

Note that China is on the sell list also. We’ll look at their concerns next.

We live in a universe that seems to be composed of interactions between frequency. The fractal nature of this interaction can be summed up by saying “as above so below” and this means that all events, cosmic, political biological and certainly economical are subject to extremes as the pendulum swings.

Therefore the seven year swing that has favored extreme growth in emerging markets may be near or past the end of its current arc. Or maybe not.

No one can come to a certain conclusion.

What we can say is that many conditions that have favored emerging markets are now less favorable and the big winners of this decade so far, India and China , should be more carefully watched.

Gary

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