India is the developing country
President Bill Clinton's
six-day tour to south Asia has brought attention to the world's second-largest country and largest democracy -- and for once, the focus is not just on India's nuclear rivalry with neighboring Pakistan. Many investors believe that attention on India's economy is long overdue.
Indeed, what is striking about the trip and the news it has produced is that it serves as a reminder how little attention the nation -- and particularly its economy -- receive most of the time. Think of dynamic emerging markets, and India just doesn't usually come to mind.
Instead, one is more likely to think of oxygen-starved Indian soldiers fighting their Pakistani counterparts over remote passes in the Kashmir Himalayas; mind-numbing poverty throughout much of the country -- and brilliant Indian software engineers who have emigrated to the U.S.
While it may be too early to speak of an "Indian miracle," the country's economy is showing clear signs of improving. After decades of state-controlled economic policy and limited integration with the rest of the world during the Cold War, a result of its friendship with the Soviet Union, India began lowering tariffs and easing central control on its economy in the late 1980s and early 1990s. As a result, the country's gross domestic product grew about 6% a year during the 1990s.
The country's economic outlook has been helped by the growth of the software industry, which, coincidentally, occurred just as the Indian government was reducing restrictions on the economy. India has become an important outsource nation for software development. Not all of the country's engineers have left for the U.S.
India was one of the few developing countries to escape the global financial crises of 1997 and 1998 largely unscathed. Ironically, India's immunity to this crises was a result of controls on foreign capital and relatively low levels of foreign investment, which meant there was not the panicked flight from the country that characterized other Asian nations.
India, however, did have some rough spots the last couple of years. The economy slowed, the market became bearish, the pace of reforms decelerated and, of course, India and Pakistan began their game of nuclear chicken.
Now, some investors think the tide has turned. Mark Madden, portfolio manager for the
Pioneer Emerging Markets Fund, and the
Pioneer Indo Asia Fund, saw "significant improvement" in the investment climate of India over the last six to 12 months.
Madden's Emerging Markets Fund is up 106% over the last year, while the Indo Asia Fund has risen 84%. The Indo Asia Fund morphed out of an earlier, all-India fund a couple of years ago, expanding into other nations in Asia.
"We thought a country fund was too narrow," says Madden. When Madden first entered India in 1993, however, restrictions -- including conducting all trades on paper and registering all trades -- slowed the process so much it made the market essentially illiquid.
Madden is bullish on India now. He believes the government is getting back on the right track with respect to reform, and the economy is picking up. (He can now make and register trades electronically.) Indeed, the benchmark
index has climbed 58% since an April 1999 low, although in the last few weeks, it has dropped 16% from a historic February high.
Madden's funds are overweight in India right now. The
Morgan Stanley Capital International Emerging Markets Index
gives India a 6% weight; the Pioneer funds are at around 14% to 16%.
For investors such as Madden, India is attractive both as a low-cost producer of high-priced, high-tech goods -- meaning profit margins are high -- and as a nation with a large and growing middle class. At 200 million people, India's middle class is the largest in the world, although the definition of what constitutes the middle class in a country such as India is a bit different than in the U.S.
Madden likes tech companies such as software firm
Satyam Computer Services
(not to be confused with its
-listed progeny, Internet service provider
). Infosys and Satyam have gone stratospheric, of course -- Infosys is up 1100% the last year; Satyam is up 712%.
Of the two, Infosys appears to be the favorite of most analysts. While its valuation is high, its profits have been rising. "Infosys is a very well-run company, even on a global basis," says Andrew Foster, assistant portfolio manager at the
Matthews Asian Technology Fund
Madden ventures from tech, however. He likes consumer loan lender
and pharmaceuticals such as
. He believes that, just as it has in the tech sector, India is poised to become a low-cost producer of drugs.
Despite its potential and the improved picture of India, the country has limited investment options. In addition to Infosys and Satyam, only one other Indian company, financial services provider
, which is up 177% the last year, is listed in this country.
While there are no all-India open-ended funds, there are three closed-ended funds: the
India Closed End Fund
, up 159% over the last year; the
India Growth Fund
, up 114%; and the
Morgan Stanley Dean Witter India
, up 100%.
India is plagued by few opportunities in which to invest and the threat of a war, with its neighbor Pakistan. Not exactly a formula for getting too excited about India. Still, the country is improving. Soon, it may take less than a presidential visit to bring attention to India.
David Kurapka's Global Portfolio column appears 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