A friend recently asked me about investing in India, after hearing news stories about its booming economy. I suggested to her that her first task should be devising an asset allocation plan and investing a portion of her portfolio in emerging markets (iShares MSCI Emerging Markets ETF is an excellent choice) and not assume any single country risk. Assuming a diversified portfolio, with a proportion of equity in emerging markets, a slight overweighting for India can be considered. One factor in favour of investing in India is its low correlation with other world markets.
There is no question that India is booming, posting GDP growth rates of 4.6% in 2002-03, 8.2% in 2003-04 and projected at 6.9% in 2004-05. Growth in the service sector has been impressive driven by business process outsourcing, which includes software development and maintenance, call-centres, medical transcription etc. The Bombay stock market has been on a tear hitting record highs.
India also faces significant social, political and economic challenges. There is widespread poverty, poor infrastructure, sizable fiscal deficits, stifling bureaucracy, political issues with neighbours Pakistan and China etc. Offsetting the challenges are a functioning democracy, well-developed capital markets, a new willingness to attract foreign investments, excellent universities etc.
Canadians wanting to participate in the India story have very few options. Indian companies like Infosys (INFY), Wipro (WIT), ICICI Bank (IBN) trade in American exchanges as ADRs. These ADRs are probably not suitable for average investors. In addition to individual security risks, investors also pay a hefty premium for the ADR over the underlying security. Infosys (INFY), for example, trades around $74 in New York and Rs. 2232 (about $51) in Bombay, a premium of about 45%. Two closed-end funds, India Fund (IFN) and Morgan Stanley India Investment Fund (IIF) that are listed on the NYSE, are a good choice for getting some exposure. Emerging Market ETFs like the iShares EEM mentioned earlier and BLDRS Emerging Market 50 ADR Index (ADRE) have a 5.8% and 9.4% exposure to India respectively (as of 31/12/2004). The Excel India Fund is probably not a good choice with a 3.89% MER and sales charges.
Recent press stories on India: