India's Unfinished Business
Comment of the Day

November 09 2010

Commentary by David Fuller

India's Unfinished Business

My thanks to a subscriber for this informative article by Arvind Panagariya for Foreign Policy, written just before President Obama's visit earlier this month. Here is the opening:
When U.S. President Barack Obama arrives in Mumbai Saturday, he'll be landing in what remains one of the poorest countries in the world, with urban slums that stretch for miles and a rural landscape that remains remarkably similar to that in the days of the British Raj. For all you hear about Internet start-ups and high-tech call centers in Bangalore and Chennai, India currently accounts for just 2.25 percent of the world's GDP and 1.3 percent of its merchandise exports. It ranks 11th worldwide in absolute GDP and 161st in per capita GDP. Its economy is less than one-tenth the size of America's, but its population is more than three times as large. So why all the hype?

The United States and many other countries are betting on India not because of where it stands today, but where they see it going in the next 15 years. In real dollars, India has grown at an annual rate exceeding 12 percent during the last seven fiscal years. Even going by the conservative assumption that the country will grow 10 percent per year in real dollars over the next 15 years, it will grow from $1.3 trillion in fiscal year 2009-2010 into a $5.5 trillion economy by 2024-2025. Depending on how Japan does during these years, India would then have either the third- or fourth-largest economy in the world.

American perceptions of India are also shaped by the large number of highly successful Indians, the vast majority of them first-generation immigrants. While the presence of Indians in the United States is not new, their phenomenal success is. Over the last 15 years, their influence in the tech and finance industries and higher education has grown as that of no other single immigrant group -- Ajay Bhatt, inventor of the USB port, Vikram Pandit, CEO of Citigroup, and Indra Nooyi, CEO and chairperson of PepsiCo, are today sources inspiration across America. At any given time, there are 100,000 bright Indian students studying at U.S. universities. They promise to be a part of the highly mobile international labor force that will play a decisive role in designing tomorrow's global economy.

A final factor driving American perceptions of India is the resilience of its democracy during the 63 years of its post-independence existence. Its vast size and diversity notwithstanding, India has remained a vibrant democracy with a fiercely independent press and judiciary and growing oversight by NGOs. Its superior economic performance in recent years has also put paid to the notion that democracies are inherently incapable of the kind of miracle-level growth that South Korea and Taiwan achieved in the 1960s and 1970s and China has been clocking over the last three decades. Unlike authoritarian China, which seeks to be a rival power and has adopted an increasingly belligerent posture in the region, Indian democracy promises to be accommodating and friendly.

David Fuller's view For many of us who have investments in India, the country's first and foremost appeal is its intellectual capital.

According to the Haragouri Dash site:

34 percent of employees at Microsoft and 36 percent of scientists at NASA are Indians.

Subscribers interested in this subject can read the sections on "Statistics on Indians in the US" and the "Socioeconomic" sections on Indian America by Wikipedia. Here is a sample from each:

A joint Duke University - UC Berkeley study revealed that Indian immigrants have founded more engineering and technology companies from 1995 to 2005 than immigrants from the U.K., China, Taiwan and Japan combined.[14] A University of California, Berkeley, study reported that one-third of the engineers in Silicon Valley are of Indian descent, while 7% of valley hi-tech firms are led by Indian CEOs.

Indians along with other Asians, have one of the highest educational qualifications of all ethnic groups in the US. Almost 67% of all Indians have a bachelor's or high degree (compared to 28% nationally and 44% average for all Asian American groups). Almost 40% of all Indians in the United States have a master's, doctorate or other professional degree, which is five times the national average.[15][16] Thomas Friedman, in his recent book, The World is Flat, explains this trend in terms of brain drain, whereby the best and brightest elements in India emigrate to the US in order to seek better financial opportunities.[17]

Indian Americans have the highest percentage of higher education when compared to other racial groups. According to the American Association of Physicians of Indian Origin, there are close to 35,000 Indian American doctors.[18] According to the 2000 census, about 64% of Indian Americans have attained a Bachelor's degree or more.[19] (compared to 28% nationally, and 44% average for all Asian American groups). Almost 40% of all Indians have a master's, doctorate or other professional degree, which is five times the national average.[15] Among Indian Americans, 72.3% participate in the U.S. work force, of which 57.7% are employed in managerial and professional specialties.[20]

What about investing in India?

Investors favouring individual shares can easily participate in India via ADRs listed in the USA and UK. I prefer a fund and my main investment in India is via the JPMorgan Indian Investment Trust (JII LN) (p&f, monthly, weekly & daily). This remains the largest single position in my personal long-term investment portfolio, but not because I put the most money into JII. Approximately 90% of this position was purchased in 2Q 2003 and I have yet to sell any JII. With hindsight I would rather have sold in 1Q 2008, but I did not appreciate the full extent of the danger in time, partly because it had nothing to do with India.

Conventional wisdom over the last three years is that buy-and-hold is passé and that one must actively manage one's investments. Conventional wisdom is usually wrong, and is always the consequence of hindsight.

Looking at the charts above, this would not be the most propitious time to buy JII. Some mean reversion towards the medium-term trend, represented by the rising 200-day MA, would not be an unreasonable expectation. That would probably be a buying opportunity.

I could take my profit and hope to buy back closer to the MA and probably have an opportunity to do so. However not every opportunity is taken and I know clever people who are long-term bulls of India but who sold JII or the equivalent in April, or even earlier. They have had cause to rue the opportunity cost.

It is the "vision thing", as the first President Bush said in a different context. India remains my favourite or co-favourite stock market for the long term. It is neither sufficiently overextended nor overvalued for me to feel compelled to sell JII. Rightly or wrongly, I do not expect another 2008-style market meltdown anytime soon, although I regard market reactions, corrections and volatility as givens. It will always be my leveraged trading positions which require closer monitoring.

What would cause me to lighten my longs in JII? A much bigger and accelerated move to the upside and or a P/E Ratio over 25 would concern me. Currently, the Sensex historic P/E is on the higher side of average.

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