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Shared Fund Investing - Time to Add Indian Funds

Because the Asian economy has grown in dimensions and importance, we have been slowly adding the single-country funds devoted to Asian countries to your international funds list.

usa, 17 May 2018 -- The first country we added was Japan, and much later China. What we required in order to present you with the added risk of a fund specialized in just one country was a reasonably large and diversified capital market that offered a portfolio manager the chance to diversify the portfolio even in just a single country. Since the Japanese and Chinese economies grew and new industries blossomed, we thought that test was met. We now feel that the Indian economy and capital markets also meet our test. With this problem, then, we're adding three India funds to our list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We might add one or two other funds to the list over the next few issues.

Why India?... Frequently previously whenever we spoke about Asia and its rapid growth we cited the twin dynamos powering that growth, China and India. Coupling the two served its purpose, but we now believe both are accepting separate identities. As we have been listening and reading on the course of days gone by 4 or 5 months, we came to the conclusion there are differences in the paths that China and India will soon be overpowering the months ahead. Both will be growing rapidly (or intend to) but one is worried about too-rapid growth (China) while another is aiming at much faster growth as time goes on (India).

To sort things out, and to obtain a better feel for the Indian economy and the capital market, we spoke to Sharat Shroff, the portfolio manager of the Matthews India Fund. The first point that Shroff made is that "a few of the days ahead for India (speaking of growth) might be much better than what's been seen in the last 2 to 3 years." For many historical perspective, Shroff remarked that India's growth rate found after the government adopted a policy of opening up the economy in early 90's. Ever since then, as more reforms were gradually introduced, growth has picked up further. By 1995, India's growth hit the high single-digits range and remained there (on average). Such growth has become taken whilst the benchmark.

Shroff emphasized that what makes India's growth different from other emerging countries is that in large part it arises from domestic demand, not from exports or commodities. There is no large-scale overhaul that India needs to undergo, he remarked. What Shroff is driving at is that in the post-recession world China's trade surpluses and the U.S. deficit must shrink since they will be unsustainable. India faces no such issues.

The next point advanced by Shroff is that the private sector accounts for roughly 80% of India's growth. The significance of that's that in India we are discussing businesses which can be oriented toward profits and return on capital. This isn't always the case elsewhere in Asia. Because of these conditions, India offers the investor an opportunity to purchase good quality companies with solid business models.

For Matthews India, Shroff stated that the fund does definitely not purchase the large cap, world-renowned companies (the Indian blue chips). As Shroff put it, in the event that you compare our portfolio with the benchmark, you will notice that two-thirds of our portfolio is comprised of small- and mid-cap stocks. We act as much more forward-looking. What the fund is looking for are those (smaller) companies which can be "participating in the country's growth and have the potential to become among the larger companies two, three or possibly five years from now."

The Indian market...We asked Mr. Shroff, what index one should watch to record the Indian market. He answered that the Sensex is the standard index followed. But in recent years, the professional community pays more awareness of the S&P CNX Nifty Index.

As for valuations, the Indian market, says Shroff, is selling at a price-earnings ratio of about 15-16 times and at about three times book value. This is slightly above historical average valuations. Also Shroff remarked that the Indian market has traditionally been expensive compared to its emerging market peers. The premium has ranged from only 15% to as high as 45%. At this time he puts the premium at the low end of the range.

There is some justification for the premium, he added. The return on equity for Indian firms is in the 18-20% range, which, as he use it, "is quite robust." Another reason refers back once again to the inner sourced elements of India's growth so you get less volatility than you do from a "commodity producer."

That is not to say that the Indian market is not volatile. "Even although the economy may be dancing to its own tune," Shroff warned, "when foreigners were taking out money from all emerging markets in 2008, the Indian market went by way of a very severe correction. (In fact) in the last 3 or 4 years the Indian market shows some correlation with the S&P 500." (We discover that recently to have been true of emerging markets as a whole.)

Shroff turned to the issue of volatility more than once. He was preaching to the converted. We're restricting our advice regarding the Indian funds to Venturesome investors only. This is actually the same policy that people have been following with regard to the pure China funds. The policy isn't written in stone, but the entire world economy would need to be functioning closer on track before we would consider any relaxation.

After the interview with Shroff, we were a lot more convinced that the single-country India funds belong within our fund list. Not merely is India growing rapidly, but we expect you'll start to see the emergence of more investment -- worthy companies as opportunities arise regarding ETF Indien. Taking into consideration the potential, you can appreciate why Asia and the emerging markets, generally speaking, have grown to be the center of the investment world's attention.

# # #

Submitted by Preetmilton on Thursday, 17 May 2018 at 9:48 PM
Category: Business
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