Tuesday, September 14, 2010

Global Growth Opportunities: India

We are impressed with the strength and future prospects of India’s economy, and we think its equity market is increasingly attractive. During the 2003-2007 global expansion, India’s robust GDP growth (which hit 9.1% in 2007) was driven by consumer demand arising from a mushrooming middle class. With only about 20% of the GDP dependent on exports, the economy was relatively isolated from the recent recession in the developed countries and enjoyed growth of 5.1% in 2008 and 7.7% in 2009. Now the economy is accelerating again: the World Bank estimates GDP growth will top 8% in 2010, with further gains of 8.7% in 2011 and 8.2% in 2012.

India’s astonishing growth, second only to China’s among the leading emerging economies, will continue to rest on the size, youth, and growing prosperity of its working class. The U.N. forecasts that the working-age population in India is expected to expand to 275 million, a rise of 46%, by the year 2025. An article in The Economist indicates that by 2020 three out of every ten new entrants to the global workforce will be Indian. Conversely, the working-age populations in the U.S and China are expected to grow by a mere 12% and 10%, and the working-age populations in Japan and Europe are expected to decline by -17% and -13%, respectively.

In addition to a burgeoning workforce, household incomes are also rising. In 2009, the IMF estimated India’s per person annual income at $1,031. At less than half the annual per person income in China and the other leading emerging economies, there is plenty of room for income growth without damaging productivity or international competitiveness. Multinational corporations, including those in China, are expected to increase outsourcing to India.

Challenges that may restrict long term growth include high inflation, inadequate physical and social infrastructure, and an ineffective and protectionist government. The Economist lists India’s inflation at 11.3% and their latest poll of economists predicts full-year 2010 inflation to be 11.4%. Recent trends such as moderating food and commodity prices, however, should reduce 2011 inflation to a manageable 5-6%.

A retardant to India’s current growth but a boost to future growth is a dilapidated infrastructure, which the government intends to upgrade with a $1 trillion investment between 2012 and 2016. To successfully implement these upgrades, India needs government reform. Historically, India’s democratic government has favored protectionism, complex labor laws, regulations that differ from industry to industry and has tolerated a lack of coordination among local government agencies. The 2009 election of Mr. Singh and Mrs. Gandhi is promising.

The investment implications of India’s rapid and assured future growth, coming at a time when the economies of the U.S., Europe and Japan are struggling, are manifest. The benchmark Sensex Index of India stocks rocketed 501% during the 2003-2007 expansion, and it soared 130% from the beginning of the global stock market rally on March 9, 2009 through September 12, 2010. In contrast the S&P 500 advanced a modest 67% and 63% during these two periods. We recommend investors focus on the stocks of Indian and other multinational companies which provide goods and/or services to the surging working class or which support infrastructure improvements.

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