Use the Melt Down to Load Up on India

August 12th, 2011
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Contributed by: The Mad Hedge Fund Trader
Take a look at the chart for the emerging market ETF (EEM) below and you will be surprised to see how well it has held up in the recent collapse. This is in sharp contrast to its performance during the 2008 crash, when emerging markets outperformed developed markets to the downside by a factor of two or three.

So I thought it would be useful to spend some time with Sunil Asnani, portfolio manager at Matthews International Capital Management in San Francisco. He argues that you want to buy these markets during periods of market instability. Historically, they take the biggest hits, but then bounce back the hardest. For example, the India market (PIN) roared back 250% after the 2008 melt down, versus only a 104% move for the S&P 500. This is what you would expect for an economy that has grown 6%-7% a year for the past two decades, nearly double the American rate.

Asnani addresses the opportunities in India from a unique perspective in that before obtaining his advanced degrees, he was the Superintendent of the Kerala Police Department. He believes that India’s growth can accelerate from this level. India is first and foremost an infrastructure play. The massive capital investment program that China is now completing is only just getting started in India. Spend six hours a day between meetings in Mumbai traffic jams, and you can understand the need. Another round of reforms and deregulation is poised to unleash India’s incredible entrepreneurial culture. It also is carving out an important niche at the bottom end of the global car market (see “Take Tata Motors Out for a Spin”).

India is on the verge of becoming the next China. Runaway wage increases of 20% a year for trained staff are rapidly pricing the middle Kingdom out of labor intensive industries. The bill will also start to come due for China’s 30 year old “one child” policy in about five years, which will create massive demographic headwinds for further growth. India, on the other hand, has one of the world’s most enticing demographic pyramids, and will remain a young country for decades to come. That brings an ever rising tide of customers. At $3,500 per annum, India’s per capita GDP is only half of China’s.

The Mumbai stock exchange has 5,000 listed stocks, but liquidity is poor and short selling is rare. While countless hours spent on the phone with tech support in Bangalore might convince you this is first and foremost a software country, it only accounts for 5% of GDP and 1% of the workforce.

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