The careful selection of different Indian stock funds allows investors to enter the Indian market at a steep discount to US price multiples, even though the Indian market as a whole is trading at higher multiples than the S&P 500. Combining these low stock valuations with a cheap currency creates a bargain buying opportunity for value investors.
India's cheap currency makes assets denominated in its currency cheap. Moreover, it scores better than Russia and China (The R and C in BRIC) for investor freedom. I will walk you through how I came to these conclusions.
To examine the investment prospects of different foreign markets, different markets were screened for discounts to Purchasing Power Parity (PPP) of their currencies versus the dollar. India currently has one of the cheapest currencies according to PPP, which is trading near a 60% discount to parity. From a top-down perspective, this is a compelling reason to consider buying Rupee-denominated assets with US Dollars.
To assess the risk of investing in nations like India with the cheapest currencies, Investment Freedom and Property Right scores were collected from The Heritage Foundation's 2012 Index of Economic Freedom. Each metric helps weigh risk or value:
The Investment Freedom score assesses restrictions on foreign and domestic investment, legal recourse available to firms and investors, as well as how burdensome regulations are for investors. Higher scores indicate higher freedom, and 100 is the highest score.
The Property Right score assesses how well the government protects private property, how well the government punishes those who unlawfully confiscate private property and corruption in the court system. Higher scores indicate greater property rights, and 100 is the highest score.
Purchasing Power Parity (PPP) is a relative price level that would allow a customer to buy the same amount of a good domestically as they could by exchanging domestic currency for foreign currency and then buying that good in a foreign country. Simply put, if PPP holds I would be able to buy the same amount of gas in the US as I could in Mexico, either by paying X dollars in the US or exchanging X dollars for Y pesos and then buying the gas in Mexico. Since currencies deviate from PPP, investors could convert dollars into a currency with a discount relative valuation and buy more assets in the foreign market than they could with dollars in the domestic market.
A table of discount currencies and risk scores reveals India is a compelling region for investing:
Indian equities are an opportunity to invest in a much-heralded BRIC market at a discount. It is the cheapest BRIC country in terms of currency PPP, and it is a less risky legal environment than Russia or China. By these metrics India is more compelling from a top-down perspective than China or Russia.
There are many attractively-priced funds which invest in Indian securities:
Morgan Stanley India
Market Vectors India Small-Cap
iShares S&P India Nifty 50 Index
WisdomTree India Earnings
EGShares India Infrastructure
EGShares India Consumer
EGShares India Small Cap
iPath MSCI India
iShares MSCI India
iShares MSCI India Small Cap
*P/E and P/B ratios are forward projections provided by Morningstar.com.
American investors should consider investing in India through shares of SCIF or SMIN. The holdings of these ETFs (exchange-traded funds) are attractively valued. Each provides an investible opportunity into firms of different market capitalizations at lower valuations than the other funds on this list. The low valuations of these ETF portfolios stack with the current cheapness of the Rupee. These two funds also have different holdings with only four companies in common between their top 25 stock investments. Investing in both would not be redundant.
SCIF and SMIN are managed well. Their holdings are diversified over many stocks and sectors. SCIF is underweight the financial sector at 12.14% of its portfolio, while 23.72% of the SMIN portfolio is financial stocks. This is almost exactly the category average. The largest single stock holding in each fund is less than 4% of total fund assets. The fees of each fund are reasonable at under 1% for a foreign stock fund.
Each of these two funds are attractive candidates for further research and small investment allocations. These ETFs are opportunities to gain from a market with better property rights, higher investor freedom, and a cheaper currency than China or Russia.
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