While Other Asian “Tigers” Grab Headlines, This Forgotten Giant Has Quietly Begun an Economic Boom…
By Justin Ford
The front pages were busy last week with President Obama’s trip to Asia. Yet while experts debate whether he bowed too low (or shouldn’t have bowed at all) in Japan… one of the most important stories about Asia didn’t make the front pages at all. In fact, the country wasn’t even on the Ppresident’s itinerary.
Yet, it’s the largest democracy in the world, the U.N. predicts it will become the most populous country by mid-century, and the World Bank expects it to become the fastest growing economy on earth next year.
I’m talking about India.
India has been off the radar even for many emerging-market investors for a long time.
- When investors talk about “Asian Tigers,” they don’t include India even though it its stock market is up nearly 500% in the last seven years.
- When they talk about rapid growth, they inevitably refer to China, even though India also never sank into recession during this credit crisis. Instead, it has averaged 7% annual growth for the last three years and is expected to grow by about 8% next year, surpassing China for the first time as the world’s fastest growing economy. And it is achieving this with far less reliance on exports than China, so it may be a more sustainable growth should the Great Recession deepen.
- When Washington talks about spreading democratic values around the world, they often neglect India—which alone among the Asian nations has had an uninterrupted democracy since the end of World War II.
India simply hasn’t gotten much attention from the investment community, though some of the neglect has been deserved.
The country has long suffered widespread poverty and for many years a caste system impeded the spread of knowledge and opportunity—two prerequisites for economic growth. Initially, after winning independence, the country also embraced socialism and developed so many pockets of bureaucracy that it became known as the “license raj.”.
But in recent years, this has changed and this year the pace of progress has accelerated dramatically. So there are now some very good reasons you may want to put India on your radar and consider investing in some of its rapidly growing companies.
Economic Liberalization Is Gaining Steam
In the last few decades, one phenomenon has probably created more wealth—in people’s everyday lives and in the markets—than any other. It’s called “economic liberalization.”. The term refers to what happens when a formerly controlled economy moves towards free-market policies.
In the 1980s, the “Chicago Boys” took control of economic policy in Chile. These were economists educated at the University of Chicago and influenced by the writings of Milton Friedman. In the 1990s, Chile experienced strong economic growth, the United Nations says one million Chileans rose above the poverty line, and stocks shot up 1,725% in less than seven years.
In Poland, per-capita GDP has more than doubled since the Soviet Union fell. And when the country began to privatize in 1993, the stock market soared 1,144% in a single year.
According to Stanford economist Robert McKinnon, South Korea’s economic growth nearly tripled after it began to liberalize. Its stock market went on to rise 1,578% during a 10-year bull market.
In 2002, Eastern Europe went into a 2nd phase of economic reform in preparation for joining the E.U. Once again, economies grew at record levels and markets soared. Hungary’s stock market rose 517%, Poland 556%, and the Czech Republic 1,391%.
Also in 2002, Inacio Lula Da Silva ran for the presidency of Brazil. He ran as a populist, but ultimately turned out to be a “radish”—red on the outside and white on the inside. That is, he implemented social safety net reforms but also reforms to cut regulation, increase privatization, liberalize foreign trade and reduce taxes. The stock market rose 130% in a year… and 2,000% over the next seven years.
These are compelling precedents because something similar is happening in India.
A History of Accelerating Reform
India began to move away from socialism after the fall of the Soviet Union in the late ‘80s/early ‘90s.
The first major change came with the appointment of Manmohan Singh as finance minister in 1991. Singh – an economist educated at Oxford and Cambridge – worked to reduce taxes and bureaucracy and free up the private sector. Progress was painstaking as socialist’s maintained significant influence in the congress. Yet over the next five years the economy’s growth rate rose from 5.6% to 6.7%. In 2004, Singh was elected prime minister, reforms accelerated and economic growth jumped to 8.7% a year over the next five years.
But this May 16th marked the biggest milestone of all.
Indian voters re-elected Singh as prime minister and for the first time in history they also gave his Congress Party effective control of the legislature! Indian stocks shot up 17% in one day. And they haven’t looked back. They’re up over 40% since the election.
Most importantly, this isn’t about a one-year boom. India is entering the 21st century and the 20th century at the same time. Its 21st century IT and pharmaceutical sectors are growing rapidly. But so are its 20th century automobile and telecom industries. And because India is starting from such a low base (its per capita GDP is about half that of China and about one fifteenth that of the U.S.), the growth can be strong for many years to come—much as China has averaged nearly 9% annual growth for the last 25 years.
Various Ways to Play
The simplest way to play India is through an exchange-traded fund. The top-performing U.S.-listed fund year to date is Wisdom Tree India Earnings Fund (EPI), up 85%. Since this fund follows an index, it’s passively managed and expenses are reasonable, just 0.88%. This could be a good place to put money, especially after any significant pullback in global equity markets.
For greater profit potential, you can target emerging leaders in some of India’s fastest growing core industries, including telecom, pharmaceuticals and information technology. A number of these are listed in New York and London and are easily traded from any U.S. brokerage account. And the number of Indian companies available to trade this way is steadily growing so keep an eye out for more opportunities in the future.
But when you look to diversify your portfolio internationally, be sure to consider India. The Bengal Tiger could turn out to be the most exciting Asian Tiger of all.