Are Indian Stocks a Buy ?

In terms of generating raw frustration among investors, India is a hard country to beat.  It has the second-largest population in the world, but unlike number one China, it also has a young, English-speaking workforce.  The country has a large and successful diaspora scattered across the globe and old trade ties that date back to the British Empire.  It’s democratic…and has an Anglo-Saxon common law legal system.

I could go on all day, but it wouldn’t matter.  Despite all of India’s selling points, the country can’t seem to get out of its own way.   Since independence from Britain, India’s economic growth has so badly trailed that of China and several other East Asian economies that economists derisively called it the “Hindu rate of growth.”  In the early days of the Indian republic, the country copied the worst aspects of British bureaucracy and Soviet central planning and melded the two into a unique Indian “self sufficiency” model that virtually guaranteed economic stagnation.

Even in more recent times, India has appeared downright hostile to foreign investment.  Earlier this year, India’s Supreme Court invalidated the licenses of several foreign telecom operators.  The Court claimed—and probably with justification—that the licenses were granted illegally by a corrupt government minister, but the incident made many Western firms rethink their decision to invest in India.  A deal isn’t a deal there.

Some of India’s “wins” are actually losses in disguise.  For example, India has embraced the information revolution better than any other major emerging market and has used the falling price of communications to create a thriving outsourced services sector.  But one of the reasons that India was so quick to jump into the information revolution is that the country’s “old economy” infrastructure (everything from roads to its sewage system) is so horrendously bad that competition with China in manufacturing is an impossibility—even though Indian wages are significantly cheaper than Chinese wages.

I give credit to India’s entrepreneurs.  They operate in an environment that would cause most Western businessmen to lose their hair or drop dead of a heart attack as they look for creative ways to leapfrog the regulatory monster known as the Indian state.

But lest anyone think that I am a perma-bear on India, not all news is bad.  Prime Minister Manmohan Singh appears to have rediscovered the reforming zeal of his earlier years and has pushed through a much-needed reform of the Indian retail sector.  He tried opening the retail sector to foreign retailers once before, only to back down at the first sign of protest. Perhaps the prime minister has rediscovered his backbone as well as his talent for economic reform.

Investors have taken note.  Indian stocks, measured here by the iPath India Index ETN (NYSE: $INP) have spent most of the past two years in a bear market but have had a nice run since late November.

Are Indian stocks a buy at current prices?  That’s harder to say.  At 17 times earnings see (FT estimates), Indian stocks are far from cheap, particularly when you compare them to Chinese and other emerging market averages.  Chinese stocks are trading hands for just 8 times earnings, and Brazilian stocks just 14.

It’s hard to get wildly enthusiastic about Indian stocks based on valuations, but that doesn’t mean that they can’t have a nice run as investors rediscover the joys of emerging markets.  I’m bullish on emerging markets in general over the next 6-12 months, and I expect to see India participate in the rally.

Just don’t fall in love with Indian stocks, or they will break your heart.  If you decide to buy India, use a trailing stop to lock in your profits for the next time the Indian government does something characteristically impulsive and causes investors to lose interest again.

Disclosures: Sizemore Capital has no positions in any security mentioned. This article first appeared on InvestorPlace  

Emerging Markets: Opportunities and Pitfalls

As I write this article, 670 million people are without electricity in India.

Stop and think about that for a minute.  That’s nearly double the population of the United States, and none of them have had electricity for the better part of two days.  Some homes and businesses have backup generators, but the vast majority of those affected were quite literally left in the dark.  Needless to say, business productivity has ground to a halt.

In a completely unrelated story, Turkish mobile telecom giant Turkcell ($TKC) released second quarter results last week that sent shares up sharply…even while the company hasn’t paid a dividend in over two years due to a boardroom dispute that could pass for an episode of the Jerry Springer Show.

Turkcell’s board is so bitterly divided that they can’t even properly schedule a shareholder meeting, and the Turkish state is threatening to intervene to break a legal deadlock that have involved courtrooms on three continents.  At one point, it was even being debated by Queen Elizabeth II’s Privy Council.

This is not a third-world, basket-case company.  Turkcell is one of the most respected mobile carriers in the world and routinely wins awards in Europe for its service quality.  And yet a boardroom circus like this can happen even at Turkcell.

Why do I bring up these two stories?  Because they illustrates both the risks and opportunities presented to investors by emerging markets.

Emerging markets are, by definition, not emerged.  They’re still a little rough around the edges and, frankly, investors should expect setbacks along the way.  The added risk is the price you pay for the expectation of higher returns.

Emerging market equities have not performed well in 2012, as slower growth in China, India, and Brazil have sapped investor enthusiasm.  The iShares MSCI Emerging Markets ETF ($EEM), which many use as a proxy for emerging markets in general, is down 16% over the past 12 months.

Emerging Market

P/E Ratio

Dividend Yield



















Source: Financial Times, July 31, 2012

Looking at a sample of emerging market indices, we see significant differences in prices.  Chinese shares, at 7 times earnings, are almost shockingly cheap, and Brazil and Turkey are priced attractively as well at 11.5 and 10.9 times earnings, respectively.

At the other end of the spectrum, Peru is trading at levels reminiscent of the 1990s tech bubble at 37 times earnings, and Colombia and India are comparatively expensive (at least relative to China, Brazil and Turkey) at 15.0 and 16.5 times earnings.

A summary comparison of emerging market stock prices does not constitute a comprehensive analysis, but one point is clear.  Outside of a few outliers, emerging market equities are cheap relative to their prices of recent years and relative to developed markets.  Investors, by and large, have fallen out of love with them as an asset class.

Barring a destabilizing meltdown in the Eurozone, I expect to see emerging market equities finish 2012 strongly.  The time to buy them is when they are cheap and unloved—as they certainly are today.

Disclosures: Sizemore Capital is long TKC.  This article first appeared on MarketWatch.

The Age of Aging

We recommend you grab a copy of George Magnus’s The Age of Aging. Mr. Magnus is a senior economic advisor at UBS, and his new book is probably the best “big picture” analysis on demographic trends that we have seen since Philip Longman’s The Empty Cradle.  Magnus’s work is a fine complement to our own research, and it deserves a place on your bookshelf.
In the pages that follow, we’re going to quote Magnus on various topics and compare his views to those of our own and of other commentators that we follow.

On the History (and Future) of Retirement:
In the preface to the book, Magnus writes,
Many of the premises on which modern welfare programs were established have changed or soon will.  Retirement pensions, for example, were designed to allow people to stop working and enjoy their last few years in relative comfort while making way for new, younger workers.  Today, although pensioner poverty is becoming a growing problem…retirement is for many an extended period of state-supported or company-financed leisure, which was never anticipated….

To address these challenges over the next decade or two, it is probable that the role and influence of the state, and what is demanded of it, will expand.
There is no question that the concept of retirement has fundamentally changed over the years.  Today, it is viewed as a true entitlement, something that is “owed” to retirees who have spent their lives working and paying Social Security taxes or union dues.  But as Magnus points out, it was not always this way. Continue reading “The Age of Aging”