FOCUS ON INDIA

There are limited funds focusing on the booming Indian stock market (see choice, bottom of this page), but before taking the plunge you should have a better sense of the risks as well as the rewards, and how such a fund might fit within your portfolio.

Over a number of years China has scored very high on a range of reforms and infrastructure development, and there appears to be strong political support for more of the same. India, on the other hand, is some years behind China in these regards, which serves to highlight the potential if there is consistent political support for the development of the Indian economy.

In the mind of the UK public there is a good sense of the Indian focus on IT services and off-shoring, and growth has indeed been impressive – after all, India apparently has more people that can speak English than the US and UK combined. But those employed in these sectors apparently account for less than 1% of India’s working population. There is much more to India.

Avinash Vazirani Manager of new Jupiter India Fund

Dynamic young population

There is great dynamism, and the potential for more is best understood by focusing on the remarkable fact that India has 25% of the worlds population under age 25. This is a key factor that excites Avinash Vazirani (seen here), manager of the new Jupiter India fund.

The Indian population is expected to rise by another 314 million over the next 25 years (which is more than the current population of the US) to reach 1.4 billion, and the Indian population should overtake China by 2040. Another important feature of the demographics is the proportion of the population over age 64 and under 15 (the dependency ratio), which should continue falling. This trend is very positive providing that they are effectively employed and not a drag on national and Government resources.

Infrastructure spending, huge potential

In addition to this positive population trend (in stark contrast to the aging Chinese population) much of the attraction of India is based on catch-up with China on reforms and infrastructure development.

The scope for infrastructure catch-up is highlighted by the following:

China spends about ten times more on roads than India
Only half of all Indian roads are paved, with just 20% considered to be in good condition
Goods sent by railway normally cost around 3 times as much as they do in China
40% of all power production is stolen

Add to this that there are 160 million surplus agricultural labourer, that India was ranked 96th out of 102 economies on labour market flexibility, that stifling bureaucracy is endemic, and you have a good sense of some of the problems facing India. Equally, you have a sense of the huge potential if they get it right.

To be fair, there is progress already. Between 1950 and 2000 they built 11,000km of roads each year. Since 2000 it has built 11,000km of roads per day.

There is cross-party support to solve many of these issues, but it will not be easy, and the risk of political upheaval is never far away. On the other hand, if India gets it right, the rewards for investors will be considerable. Even on more realistic assumptions, taking into account these obstacles, HSBC calculate that GDP per head will rise by 150% over the next 10 years, a strongly positive trend for investors.

The growth potential

Franklin Templeton stress that you should continue to expect the sort of volatility that was encountered in May/June 2006, with falls in excess of 30% - it is the price you pay as an investor for the considerable potential. They believe that the pace of reforms will be mixed, but will be moving in the right direction, and income levels will continue rising for many years, with domestic demand making the economy less exposed than many Asian neighbours to any global weakness.

A carefully constructed Indian portfolio, according to Franklin Templeton, should return 12-15% per annum for investors that stay invested for at least 5 years. We would be inclined to say that your time horizon should be at least 10 years, but other than that we acknowledge that more prudent fund managers such as Franklin Templeton tend to understate potential in such public predictions.

Recently earnings announcements tended to surprise on the upside, the banking system is sound (honestly!), industrial production is healthy, exports account for only 15% of GDP, (making India less exposed than others to a global slowdown), and privatisations of publicly owned companies can keep the stock market on the boil for some years, as they did in the UK throughout the 1980's.

Immediate concerns (and opportunities)

Emerging markets performed very well in 2007, while the developed world increasingly worried about the repurcussions of the credit crunch. This changed from early 2008, as investors concerns broadened, and there were still decent profits to be taken from emerging market holdings. The Indian stockmarket is now down more than 25% from its peak in January 2008, and inflation is probably the overwhelming concern at the moment.

The global rise in commodity prices has been well documented, including a 40% increase in rice since January. Moves have already been made by the Indian government to quell rising inflation, and we should expect more of the same, particularly as there must be an election by May 2009.

Yet the inflation concerns need to be put in context. In the 1980s the average inflation across emerging markets was 31%, and 48% in the 1990s. So far in the 2000s it is under 6%.

Moreover, the price falls in the Indian stockmarket are welcome in so far as some of the steam has been taken out of it, valuations are down to much more reasonable levels, and the huge long term potential remains intact.

There are many obstacles for India, but the long term potential is considerable with consistent political support.

There are limited choices, and our preference is this exciting, relatively new, launch:

Jupiter India ABOUT BUY

Within this fund commentary (click "About" above) we also consider the issue of risk, and what part a fund like this should play within your portfolio.

I do commend Dennehy Weller for the Top Funds publication as I feel it gives investors like us the r...
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