Saturday, February 7, 2009

Volume 3, Issue #9

Also in Today's Issue...

Today a thriving, independent India still generates enormous wealth for well-placed investors. India's nearly 1.3 billion people represent a huge, low-cost labor pool. Even better, around 300 million Indians are part of a fast-expanding middle class of educated, skilled workers. This invaluable human resource has allowed India to become a world leader in industries as diverse as generic drugs and software.

India is also the world's most populous democracy and has an effective legal system, much of its based on British traditions. And there's another invaluable vestige of the empire: For many Indians, English is a second language, helping to ease communications and trade with the West.

The country's high-tech sector has been one of the growth leaders of India's expansion. According to data from the National Association of Software and Services, India's information technology (IT) sector grew at a +28% annualized pace in the fiscal year ended March 2008. In this fiscal year, growth is likely to top +15% despite the sharp slowdown in the global economy.

But that's not to say that India is a totally export-driven economy. The country's burgeoning middle class is now generating enough disposable income to kick-start domestic demand. Just as in developed nations, India's middle class is buying automobiles and homes, as well as spending on family holidays within India and abroad. For the first time ever, Indian banks are offering credit to consumers in the form of home and automobile loans -- credit growth has helped to fuel domestic spending.

The combination of strong growth in exports and emerging domestic demand has powered India's economy over the past few years, with growth hovering near +9%, as you can see from the chart. Of course, like all countries, India has seen the impact of the global credit crunch and the most severe slowdown in the global economy in more than 20 years.

But it still offers one of the highest growth rates in the world, and despite that, investors have sold off Indian stocks, leading to attractive valuations.

According to data from the Reserve Bank of India, foreign institutional investors (FIIs) pulled some $13 billion out of India in 2008, the first outflow of foreign capital in 11 years. This contributed to a severe sell-off in India's benchmark SENSEX Index last year.

In the short-term, two other factors have pushed India's market lower. First, the recent terrorist attacks in Mumbai, India has strained relations between the nation and neighboring Pakistan. Secondly, the discovery of a major fraud at IT firm Satyam (NYSE: SAY) has shaken confidence.

But fraud is certainly nothing unique to India -- the cases of Enron and WorldCom suggest that the U.S. is also vulnerable to these problems. Meanwhile, India-Pakistan relations have calmed somewhat since last year's terror incident.

There are reasons for optimism; in fact, India is in a better position than most emerging nations to weather the current economic tsunami and generate strong growth. Consensus estimates suggest the Indian economy will begin to re-accelerate as early as the third quarter of this year. Even better, some of India's best-placed stocks are trading at bargain valuations, offering investors an outstanding opportunity to buy into the stellar long-term growth potential of India at an attractive price.

With these points in mind, I believe now is an excellent time to take advantage of short-term weakness and buy into the Indian growth story.

-- Paul Tracy
Editor
StreetAuthority Market Advisor

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