India has always been my nominee for country most overlooked by investors. From an economic standpoint and with a number of attractive companies, it has a lot going for it. However, it's not often mentioned as a hot, dynamic market, even though the benchmark
index rose 64% last year. It's kind of the
Susan Lucci of emerging markets.
Like the soap actress, who was overlooked for 19 years in the
, India has been snubbed again this year by international investors. The index has only recently regained some of its year-to-date losses and is still down 7.9% this year. Over the past 52 weeks, it is basically flat. The question for U.S. investors is whether that neglect translates into a buying opportunity, or is a setup for disappointment.
Exhibit A is the reaction to the first-quarter earnings announcement last week of Indian information technology services firm
. The company announced that its profits had doubled in the first quarter over the same period last year, a pretty impressive feat that exceeded analysts' expectations. Considering that the stock has fallen 58% from its February high to its current price of $156, one would think it looked attractive. Yet the stock has actually dropped 14% since the earnings were announced.
In addition, the four India
closed-end funds are all trading at considerable discounts. That means that the share price of those funds, which trade like stocks, is less then the
net asset value of the fund per share. Most analysts consider anything greater than a 20% discount pretty significant. The
, which is down 15% this year, is trading at a 31.4% discount. The
India Growth Fund
is down 25% this year with a discount of 35%. The
Jardine Fleming India Fund
is down 5.26% this year and trades at a discount of 32.6%. Finally, the
Morgan Stanley Dean Witter India Investment Fund
is down 27.7% and has a discount of 38.4%.
If you're one of the managers of those funds, don't worry. It's nothing personal. Since all four funds carry such large discounts, one must assume that it is not the funds themselves but the country in which they invest that is making investors nervous.
But discounts of that magnitude also present buying opportunities. Sooner or later the price will edge back towards the net asset value, if for no other reason than that the fund managers are under pressure to push up the share price by buying back shares.
To get an idea of whether Infosys was representative of an overall India appeal, I asked several fund mangers who invest in emerging markets what they thought of the country as an investment. I chose managers of diversified emerging markets funds because I wanted to avoid managers who by dint of their fund's mandate would be loyal to the country.
"India has a fantastic long-term story," says Eric Ritter, manager of the
Driehaus Asia Pacific Growth Fund. "The problem this year is valuations," he says. "They're still out of whack."
How out of whack? The price-earnings ratio of Infosys shares traded in New York is 263; the software and programming industry's P/E is 54.
Eswar Menon, manager of the
Loomis Sayles Emerging Markets Fund
takes the opposite view. "India looks attractive," he says. He especially likes Infosys and has been increasing his position because of its current dip. India may not be his favorite emerging market, but it still represents one of the largest country allocations in the fund.
Overall, India has many of the ingredients that should attract investors, at least those willing to accept the risks associated with emerging markets. India's market has relatively low liquidity and rules restricting foreign investment that deter a lot of investors. However, it has an improving macroeconomic outlook, with expected GDP growth this year of around 7%. The government, which has long exercised a heavy hand in the economy, has begun to adopt a more free-market stance.
The country has emerged as a dynamic outsourcing locale for high tech companies that take advantage of a highly educated populace that is still relatively low-paid compared to the U.S. In that sense, it is not a typical emerging market, but one that offers exciting New Economy plays. India also has potential as a market with a huge, growing middle class.
My sense is that India should be part of a portfolio that is willing to enter emerging markets. Investors may not yet be crazy about the market, so a huge rally is probably not yet in the wings, but its long-term prospects look good.
Waiting can pay off. Just ask Susan Lucci. She finally won her Daytime Emmy award last year.
David Kurapka's Global Portfolio column appears Mondays, Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at