Indian markets had a forgettable 2011. Many investors have written off India due to the internal and external challenges it faces. However, now may be more important than ever to pay attention to India. Here are three reasons why:
Indian markets were substantially trampled due to the EU Debt crisis. Compared to other emerging markets - like Brazil, Russia and China - India received more than its share of punishment. Here's the 2011 performance chart of the country specific ETFs to prove it, courtesy of stockcharts.com.
India significantly trailed the other BRIC markets in 2011.
India had internal challenges as well but many of those challenges - like the devaluation of the rupee by close to 16% - were the result of the crisis. Once the EU debt crisis moves towards more certainty, investors will again embrace more volatile markets - like India. Those flows should significantly lift markets like India. Take note of the previous "risk off" mentality in 2008 as demonstrated in the chart below. India was off over 50% and then bounced 70% and 17% respectively over the next two years.
The last 5 years have been a roller coaster ride for investors in India markets.
Interest Rate Cuts
India has had its share of economic challenges and chief among them has been inflation. The Reserve Bank of India (RBI) has been trying to tame inflation since March of 2010. Inflation in certain categories - like food - cracked the low double digits in the fall of 2011. However, it now appears that inflation is slowing and the risk for India is not inflation but a material slowdown in economic growth. Thus it now appears that the RBI is likely to cut interest rates going forward. That's a big deal in India where interest rates are currently 8.5%. (see chart below from World Bank data) A cut in interest rates places more money into the hands of businesses and consumers which should be positive for Indian stocks.
India's interest rate stands at 8.5% today, .25bps above Egypt.
India = Growth
Unlike many other investment options that are country specific, India is a country that is still growing. Here's a 50 year chart showing the GDP growth India has achieved.
India has a long term track record of GDP growth.
Bolstering India's economic growth trajectory is that India will become the largest country in terms of population in less than 10 years, according to United Nations data . Here's the comparison in terms of population between current leader China and India - with the United States thrown in for perspective. (Source:World Bank)
India will be the most populated country around 2020.
Indian demographics are favorable too. Consider that 50% of Indians are under the age of 25 right now. This younger workforce will yield more productivity per capita for India. Technology is also coming to India to increase its productivity. Today India has 100 million internet users, but that's only an 8% penetration rate. And it's hard to believe but India will surpass 900 million mobile subscribers in 2012 - three times the entire population of the United States. India is growing in a variety of ways and in a world where growth opportunities are dwindling, India can't be ignored.
Ways to Play
Keep an eye on the three factors in 2012 and be ready to pounce on India ETFs like PIN, EPI and INDY which have a healthy allocation to large caps. (Large cap companies tend to get the first taste on new inflows in India.) Should the Indian market continue to experience positive momentum the Indian infrastructure ETF, INXX, and the Indian consumer ETF, INCO, look promising as well. Finally if India has a sustained rally, money will trickle down to the Indian small cap stocks. These stocks and ETFs have suffered the most in the last year and could see significant upside in a sustained rally. SCIN and SCIF are the two choices available.