Last week India was granted MFN (Most Favored Nation) status by neighboring Pakistan. While politically significant and not without controversy, the economic implications for India consumer companies are very positive. In the past only a handful of Indian goods could be officially sold in Pakistan, now most of those roadblocks are gone. To place that positive economic impact in context, The Economic TImes reported that bilateral trade could triple from $2.6 billion to between $6-$8 billion in just a few short years. So will this development ignite the performance of the Emerging Global Shares India Consumer ETF (INCO), or will INCO remain an ETF with just a good story behind it?
The emerging consumer investment thesis has been around for a number of years but it always focused inward. Consumer goods and service companies in India were supposed to be solely driven by the massive increase of the middle class and thus consumption. That story is still in place but has been stalled by the inflation problem in India which has resulted in tamping down the consumer through a rising rate mandate. Now with the MFN news, it appears another large market opens up to these Indian consumer companies creating new prospects for an opportunity that crosses country lines.
There are still many external and internal obstacles to the India consumer story though. An official MFN announcement means little unless the specifics can be worked out with Pakistan. The EU crisis must resolve as well. Internally India faces an odd mix of challenges. Chief among the challenges is food inflation. This past week it was officially reported that food prices had risen 12% year over year in India. (As an example, vegetable prices were up over 28% since last October.) As we have witnessed before - in the Middle East just this year - food inflation is a tricky problem to deal with, touches the entire population and therefore has the potential to generate significant unrest. India has to address this issue quickly through more food supply and not trust that monetary policy will be the elixir. (BTW, petrol prices are on the rise too.)
Even in the midst of inflation challenges for the Indian consumer, there are bright signs from the consumers themselves. As an example, on October 30th, Nielsen came out with their Global Online Consumer Confidence Survey 2011 Q3 and despite India falling five points in confidence the report ranks India consumers as the most confident...in the world. Here's an excerpt from Nielsen's news release: (emphasis added)
Asia Pacific continues to dominate the list of most optimistic countries with seven of the top 10 highest consumer confidence scores hailing from this region. India, despite a decline of five points, retains the top spot with an index of 121, followed by Saudi Arabia (120), Indonesia (114), Brazil (112), Philippines (112), Thailand (109), United Arab Emirates (105), China (104), Hong Kong (104) and Malaysia (101).
The big picture for INCO and India consumer stocks is that the fuel for a long term ignition of India consumer stocks is mounting, yet the EU crisis and India's inflation issues are creating a tough environment for any spark to fully ignite that fuel. In my opinion however, it's just a matter of time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Christian Magoon is the publisher of IndiaETFs.com. This article is not intended to provide investment advice or is it intended to be an offer to buy or sell a security.