I continue to be impressed with the guys from Atyant Capital, who are launching a hedge fund specializing in smaller stocks in India. I interviewed them a few weeks ago about investment opportunities in India... but I never published the interview here because I was concerned about stocks in emerging markets getting hit.
By Dr. Steve Sjuggerud, Chairman, Investment U
I talked to them again last week, and I was glad to hear that they weren't delusional about the prospects for their asset of choice - emerging market stocks. (They brought it up, not me.)
They have an excellent (though short) investment track record in India. And they simply see a bear market as an opportunity to show the world what they can do, as rough markets will separate good money managers from bad ones.
Steve Sjuggerud: Why do you guys like investing in India and how do you think it compares to China?
Rahul Saraogi: China has no doubt been one of the most spectacularly growing economies in the world, and no doubt, India's economy has failed to keep pace. However, we think that India is a superior place for investments now, as it offers much better returns on capital and because the India story is only getting started, while a large portion of the China story is behind us. Sustainability is a big factor, as well.
Steve Sjuggerud: What do you mean by sustainability? And can you elaborate on the China versus India story?
Rahul Saraogi: China has failed to develop several institutional processes and structures that ensure continuity and sustainability. By contrast, democracy, rule of law, and freedom of press are well entrenched in the Indian political economy. China, on the other hand, fails on all three counts.
India has seen two major regime changes in the last decade, and the transfer of power has been democratic and peaceful. These regime changes reflected the changing aspirations and needs of a rapidly evolving population and vote bank. Democratic processes and institutions act as pressure release valves for countries whose social fabric is being transformed so rapidly.
China, on the other hand, has pretty much grown under the decree of the Communist party. Growth has been directed and accelerated by the Communist party in the direction it sees fit. While the coastal areas of China have developed rapidly, there are huge tensions in Central and Western China, as well as in the rust belt to the Northeast, where there is a large concentration of state-owned enterprises. The Chinese government routinely suppresses the media and facts and figures emerging from China are almost always suspect.
Steve Sjuggerud: True, but China's growth has been staggering, regardless...
Rahul Saraogi: No doubt, China unleashed a phenomenal growth engine over the last two decades. However, the origin and fueling of this growth has happened by creation of huge systemic misallocations. However, this growth has enabled the Chinese government to contain at least apparent social unrest. As these growth opportunities slow (capital investment at 40% of GDP is just not sustainable) and in many places bubbles burst, China will have to deal with social discontent and upheaval and it will find itself lacking in the pressure-release valves of democracy and freedom of expression.
Steve Sjuggerud: Sustainable or not, what China has done in the last two decades is without precedent. But when I read Jim Rogers' comments on India, he talks about the horrible roads and infrastructure, and how it takes so long to do anything. Can you comment on that and how it relates to investments in India?
Rahul Saraogi: Sure. India's bloated bureaucracy - a legacy of its experiment with socialism - continues to stifle its growth compared to China. This, however, is changing rapidly. With 80% of its population under 45, and 50% of its population under 25, and with a rapidly deregulating and reforming economy, the power and influence of the bureaucracy is slowly and surely declining. The democratic process often slows down policy changes and new reform initiatives, but they are well debated and more sure-footed with nationwide consensus. We have seen reforms and deregulation progressing through successive governments with diametrically opposing ideologies.
Steve Sjuggerud: Maybe India scores on the political front, as you say, but the real question is the question Jim Rogers raised - which is basically: Why does India seem to be such a shambles compared to China? What's the difference?
Rahul Saraogi: For lack of a better analogy, we think the difference between the two economies is similar to the difference between Japan and the U.S. The U.S. has grown in a sustainable manner over the last century due to its economic institutions and processes. Japan emerged on the scene suddenly in the 1970s and 1980s and then fizzled out in the 1990s.
The characteristics that helped the U.S. get ahead of Japan, says Rahul, are the exact ones that will help India get ahead of China in the future.
[From Investment U, is a twice-weekly e-Letter, written by Dr. Steve Sjuggerud]