Why India Is The Best Of The BRICS


In the editorial section of The Wall Street Journal, Ruchir Sharma opined about the state of emerging markets; Sharma is head of emerging markets for Morgan Stanley. The most important aspect of his editorial — The Emerging Market Comedown — was not what he said; it was what he did not say.

Nowhere in the entire editorial did he mention India; not once. He talks about all of the other constituents of the BRICS falling apart, but never mentions India. My takeaway is this: While a lot of the countries in the developing market universe aren't doing well, India, by default, is. I’ve been attempting to draw attention to this fact for some time.

Now is the time for investors to take a hard look at and begin investing in India. Of all the developing nations around the globe, India is poised to become an economic superpower within the next 20 years. As the elections currently being held attest, Indians have decided they have had enough of political dynasties cloaked in ineptitude and corruption; of inconsistent running water and electricity.

The numbers are staggering.

The total electorate in India is about 818 million people, of which 400 million belong to the middle class. Most exhilarating is the extremely high turnout at the polls; an estimated 65% to 75%. This is the first election in India’s 67-year history in which the outcome of the elections will be dictated by a middle class that is no longer politically apathetic. A recent rally where the main speaker was Narendra Modi — hopefully the next prime minister of India — drew some 300,000 people across all classes.

Modi is able to appeal to all classes because he is a self-made man; he once sold tea at his father’s roadside stand. NaMo euphoria is gripping the country. And why is the Modi’s BJP party’s win good for India? Because the BJP party is viewed as business friendly and looking to the capital markets for solutions. Of course, now that I've read Mr. Sharma's editorial in which he explores the problems of the BRICS — minus India — I’m even more confident of my position, despite the fact that it was met by ridicule not so very long ago.

Another reason I'm so bullish on India is because of Raghuram Rajan, the Governor of the Reserve Bank of India (RBI). Rajan is focused like a laser beam on reducing inflation in India. He's been criticized by the finance minister for not focusing on growth. But you cannot have growth with high inflation; you must bring it down. The prime lending rate is very high and small- and medium-sized enterprises cannot afford to borrow and invest.

If Rajan can bring inflation down, and it leads the banks to reduce rates, then companies can borrow and invest.

In fact, things at the macro level have already started to improve due to Rajan's actions guiding the rupee. For instance, last summer the rupee slumped to a record low of 68.85 to the dollar. Rajan’s policies have helped raise it to around 60 today. Also Rajan surprised (pleasantly) many when he said India's current account deficit (CAD) for the fiscal year 2013 was $56 billion, well below estimates of $70 billion. India's large CAD, which stood at $88 billion the previous fiscal year (2012), has been, in my view, the main reason for the fall in the rupee. The current CAD now stands at less than 1% of GDP!

So what's wrong with the rest of the BRIC group? Well, Brazil is imploding. While Brazil is doing a lot of window dressing for the World Cup and Olympics, it has a great deal of structural problems and a lot of social unrest. In fact, this World Cup, which starts in about two months, will be the most expensive ever, approximately $11 billion. As if this wasn’t enough of a hurdle, Brazil now risks not having the infrastructure in place when the opening ceremonies begin.

Brazil had hoped that these games serve to showcase it to the world, and now it will have to be satisfied with just the basics. What's interesting and, to me, alarming, is that the majority of the social unrest is coming from the middle class, who feel they have been overlooked by the government as the country begins its next electoral cycle.

Russia has slid precipitously down the developing market ladder and may soon become virtually irrelevant in a 21st century economic world, if they believe they can involve themselves in their adventures without any economic repercussions. They have done nothing to strengthen their infrastructure.

The major moves have been focused on making a minority very wealthy rather than investing in the country. Moreover, the big driver behind Russia’s wealth — its oil and gas — is under threat, as Russia is increasingly being viewed as an unreliable source of energy. Mr. Putin has to deal in the real world. The MICEX is down 12.84% year to date and the ruble has also suffered badly as the chart below indicates.

China is a top-down economy driven by central planning. I recently heard an analyst say that China is the only country that knows what its GDP is going to be on January 1! Watch the real estate bubble that is developing there and the shadow banking system. Right now, according to my research, at least 20% of all mortgages are bad.

And what can we say about South Africa, other than the Pistorius murder trial is monopolizing headlines in that country, President Zuma will remain in power and Nigeria has now overtaken it as the largest economy in Africa. I think it’s going to be quite a while before South Africa can again be among the world’s fastest growing developing countries. Until then, it’s not worth talking about. Sad but true.

I'm not telling you not to invest in Brazil or in any other of the BRICS. I'm telling you that other countries will do better and, in terms of the BRICS, India is the best of the bunch—and the only one of the five still worth investing in.

There are many ADRs available in the US should you prefer that route. There are ADRs for the Indian banks, which are loved by investors because they are highly profitable, highly regulated and highly capitalized. The best of these are HDFC Bank (HDBK) and ICICI Bank (ICBK) Pharma is a very big business in India and Dr. Reddys Laboratories (REDY) is one of the best known.

Lastly, the two largest computer companies in India—Wipro (WPRO) and Infosys (INFY) also have ADRs in the US. There are also numerous mutual funds and ETFs, both passive and actively managed. The top three mutual funds are Matthews India (MINDX), up 14.13% YTD (as of 4/11); ALPS/Kotak India Growth (INDIX), up 11.30% YTD; and Dreyfus India (DIIIX) up 10.87% YTD. The three largest India ETFs available in the US are Wisdom Tree India Earnings Fund, iShares MSCI India Index and PowerShares India Portfolio.

The only possible damper to the Indian economy may be an ‘El Nino effect’ which could worsen the monsoons this year and adversely impact agricultural productivity. But, according to the IMF, the Indian economy will grow at a clip of 5.4% in 2014-2015 and by 6.4% the following year. I trust they have taken the damper into account!

Peter Kohli
pkohli@dmsfunds.com | 484.671.3011

Learn more about DMS Funds here | Visit us on Twitter

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs , International , Investing Ideas

Referenced Stocks: INFY

Peter Kohli

Peter Kohli

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