Posted on: Sunday, April 25, 2004

India's fast-growing economy luring key investors

By Porus P. Cooper
Knight Ridder News Service

PHILADELPHIA — About five years ago, Pioneer Investment Management Inc. of Boston gave up on its India mutual fund, first widening its scope to Asia and then folding its holdings into an even broader emerging markets fund.

There were the usual prudent investment reasons for pulling back: The Indian markets were in a long slump, and Pioneer was rethinking the wisdom of offering single-country funds.

But Mark Madden, who manages Pioneer's emerging markets fund and had managed the India fund, said another reason was the sheer frustration of doing stock trades in India — a slow, cumbersome process fraught with errors and fraud.

So why is Madden's emerging markets fund, with $292 million in assets, disproportionately into India now? More than 10 percent of its portfolio is in Indian companies — twice the amount of the fund's benchmark MSCI emerging markets index.

Madden is expecting a new wave of Indian economic liberalization, including more privatization of state-run enterprises and continued rapid growth in the country's economy.

The liberalization efforts that began in the early 1990s are credited with triggering its revival.

Madden expects India to become an even more attractive venue for work shifted from other countries — and not just from the United States.

In the next shift of global cost advantage, he also expects India to become a bigger exporter of manufactured goods, mainly automobile parts.

Last year, India became the fastest-growing major economy in the world after China, with estimated growth of 8 percent, measured in terms of local currency, versus China's 9 percent.

Investment risk

Investing in markets such as India is "incredibly risky" though, warned Morningstar analyst William Samuel Rocco. India, for example, presents unusual political risks — such as a potential nuclear confrontation with neighboring Pakistan.

Investments in mutual funds focused on emerging markets should total no more than 5 percent of an aggressive growth portfolio, according to Standard & Poor's Corp.

Still, foreign investors poured $7 billion into the stock of Indian companies last year and that number may balloon to $20 billion this year, S&P said, citing news reports in India.

The lure seems to be returns such as those registered by the Eaton Vance Greater India fund. The lone open-end India fund fully invested in India, according to Morningstar, it has returned 113 percent over the 12 months ending Feb. 29.

India's advantages

India is beginning to capitalize on some unusual advantages, said Rakesh Shankar, economist at Economy.com, in West Chester, Pa.

"Its biggest advantage is having a huge, educated, English-speaking population. That sets it apart from most emerging markets," Shankar said.

Shankar traces India's current economic spurt to the Y2K crisis, which earned Indian software programmers worldwide notice as they came up with solutions.

"The ... goodwill earned then is permeating other industries, such as energy, consumer goods and automobiles," Shankar said.

A rising standard of living has meant that India's growing middle class has begun to behave like Western consumers, rather than "hoarding everything they earn," he said.

Moreover, Rocco said, it is a democracy with a longer history of capitalism and better legal protections for investors than China.

There also is unusual diversity of economic activity. It's not all software programming and call centers.

For example, the S&P CNX Nifty Fifty index, which tracks 50 Indian stocks, includes Wipro Ltd., which is listed on the New York Stock Exchange, and Infosys Technologies Ltd., listed on Nasdaq — two software companies whose armies of inexpensive programmers send a chill down the spines of their American counterparts.

The index includes a slew of banks, motor-scooter and steel manufacturers, power and telecommunications companies, a petrochemicals giant, a media company and more.

That makes India unusual among its peers, Rocco said.

But he cautioned that India, like other overseas investment destinations before, could end up being the flavor of the year.

He noted that the Indian government is still perceived to be riddled with corruption and bureaucratic inefficiency, and that it is unclear how the U.S. political backlash against exporting software and call-center jobs to India will play out.

It's best to get exposure to India and other emerging markets through large-cap international funds, Rocco advised.

Besides, investments are made not in economies, however fast they are growing, but in companies — and investors still must pick the right companies, he said.