The Bull Case for India

of the story you hear. And one thing I always learn about India is Jeff Gunlock, the famous bond manager said in twenty fifteen, I recommend buying India and then not looking at your statement for twenty five years. So I went and looked. He said that about eight years ago. India's up eighty six percent since then. Now the US is up more. But you're doing pretty good, Joel. But there is a lot of volatility. India can have a really bad year or a bad stretch as an emerging

market country. So it's just interesting to you know, all these things are available to you via ETFs, and there's about a dozen India ats. Since I think it's a good time to revisit India.

Apple supplier Fox Con building plants in India. iPhone is shifting some of their plants to India away from China, and a few interesting stats about India is that more than half of their population is under the age of thirty. They have the largest youth unemployment rate in the world,

but they're also the fastest growing large economy. They rank third by highest number of billionaires, but on a per capital income they ranked tenth, so to put this into perspective, the US GDP per capital is seventy six thousand, while India is only two point three thousand, so that's a huge difference. Mainland China, for instance, is twelve thousand, seven hundred, Japan is forty three thousand. So India is growing at very rapid pace. Their wealth is growing roughly twelve percent

annually and from a performance standpoint MSCI. Most of the Indian induses have performed roughly ten percent this year, and from a funds perspective, India is one of the cheapest region by management fees, so on average they only have twenty eight basis points the average management fee on their products, and for the US it's roughly fifty five basis points. Hong Kong is ninety five basis points, Taiwan is seventy

five basis points. So a lot of people are looking to India right now because not only is it performing well, but it's also a very cheap area to invest in too.

and that'll continue to be the story. And India right now is not just the most exciting emerging market today, but it's kind of like the perfect emerging market. And the reason is that and we saw this in China. I mean, this is basically like China fifteen or seventeen years ago when I first got involved with the emerging markets. And what's happening is that those consumers they're becoming consumers,

but they're also experiencing two things that we've had for decades. First, they're getting their first ever computer and it's not a desktop computer and it doesn't have an Apple logo in most cases. The sub one hundred dollars android based smartphone is bringing the computer to the world for the first time. And you know, three months ago, I would have told you you could get a brand new Android based smartphone in India for fifty dollars and that's still true. But

now you can get one for twelve dollars. So Geo Digital introduced the Geo barta smartphone, which is a twelve dollars smartphone. It's you know, it's not a fifteen hundred dollars iPhone in terms of its capacity and power, but it works for you know, making digital payments and watching video, which are the two primary things the Indian smartphone user wants to do right now. And in addition to being the first ever computer for these people, it's their first

ever Internet access. Again, when China got to this stage, they barely had any personal computers and there was no smartphones. Now India, you know, fifteen year later, fifteen years later, it looks demographically like China. Did you know, It's the biggest country, it's the youngest country, it's got the fastest

growing economy. But it's also coming online. When the arc of technology is at a point where you know, the smartphone, the supercomputer in the pocket is somewhat ubiquitous, and India represents the biggest part of that.

leading digital payments. And in India they have this systematic investment plan. It's similar to a four oh one K in the US, but you can start depositing fixed amounts at a regular interval and in India you can deposit as little as six US dollars per month. And so this plan has really helped a lot of the Indian funds get tons of inflows. And so roughly the estimate is this year nineteen billion of equity inflows are as a result of this fund. And this is the use

of technology. Because everyone's getting a smartphone, they're now able to invest more easily, while previously they'd have to go to a bank.

fast an economy can grow. The other thing he said was they tried to set up a Shopify type company there and it failed because there's just no way to get stuff to people quickly like here where there's streets and everything's very much like there's postal service or UPS or FedEx. And so that company that did Shopify actually switched gears and did a courier service that grouped a bunch of couriers together to make the infrastructure first before you could even attempt to shopify. So I guess it

did this. What I heard laid a rougher landscape, not quite as tech oriented and not quite as ready.

what I think are the upsides beyond the expectations. The credit market, as you mentioned, is very very small, and the you know, very few people had a bank account, and even to go a step further, you know, almost nobody had a government identification card fifteen years ago, and so it's hard to modernize your economy if no has a digital payments form and nobody has an identification But this is this is going to change, and it's already changing,

and it's because of the digital public infrastructure they've built, which again is the secret sauce, the so called India stack. And what I believe is that that growth of consumer credit is actually going to happen. It's not going to happen with traditional credit cards and traditional banks, and it's

going to happen with digital providers. And what's exciting about that is if and these are you know, numbers I've seen from economists that have studied this closely, but if China's or rather if India is able to develop its consumer credit market to look more like a you know, developed world, it could add two or three full percentage

points to the country's growth rate. And that's one thing I think that you know, I think it's quite possible that the growth hasmates for India are understated because of the power of this digital platform they've built for the country and the potential introduction of consumer credit. Now to your second point about logistical challenges, Yes, this is you know, one of the things that I saw seventeen years ago when I got you know, focused on emerging markets was

that China and India were actually pretty close. China was a little bit ahead of India, but not very far. And but what you can see was China was building the world's greatest infrastructure to create products and get them to the water and onto a boat. And they've got the world's best infrastructure and India has lagged in that

and that certainly includes higher logistics costs. And I think the reality is that the Indian e commerce market is going to look different than the other you know, e commerce markets out there, and it's going to be hyper localized. So if you think about, you know, where is commerce happening now in India of you know, consumer spending happens, you know, retail spending at the thirteen million mom and pop Karana stores, which are like you know, Bodega's with

a couple hundred items. And while you know, more formal retail has gone to India, it hasn't really you know, taken much share. So ninety percent is still in these mom and pop stores. And what's what's already happening is you're going to see a hyper localized e commerce market where rather than replace the mom and pop stores with a you know, first a Target store, then an Amazon, they're going to leap frog. And indeed, those mom and pops are going to be an important part of the

e commerce story in India. And that's again already happening, and they're getting digitized.

of those that consumption infrastructure we take for granted. And and so the internet companies have been the best way to invest in the United States, They've been the best way to invest in China, and I am quite confident they will be the best way to invest in in India. That you know, the expectations are that India's economy will you know, nearly double by the end of the decade, but the internet economy is going to grow five hundred

percent in that period. So I think that it's you know, just as we've seen all over the world, the internet companies lead the way and growth. And one of the other advantages in emerging markets in India in particular, is that if you look at, you know, the existing market cap and where are the companies, you have companies like Adannie and these large family controlled conglomerates that may be

somewhat opaque well with the internet companies. And this isn't just in India, this is in Brazil and everywhere else. That basically the founders are going to the best colleges of the world, and then they're working for Google or Microsoft or Apple or whoever, and then they get their MBAs at the best colleges in the world, and then they start these companies and they're clean. They start them

from scratch. They're funded by US or local institutions. And so the capital formation process of the internet companies, I think lends to better corporate governance in a part of

the world where that's one of your biggest problems. And the other and important thing I would say is, you know, when I got involved with China fifteen years ago, the first question I had for our portfolio managers was get, you know, give me a list of all the companies in the China et Because when I was first asked to help people invest in China, I assumed that we would buy the FXI, which was the only Chinese ETF

on the planet. And I was horrified when I saw that the holdings of the FXI were eighty percent government owned banks and oil companies. And so if you look back now and say, okay, yes, you know, looking out from two thousand and five, say oh, yes, it looks like China is going to grow a lot.

They're about seven percent stat owned enterprises. These are again government owned banks and oil companies. China has kept their SOEs more, you know, relevant India has let their SOEs, the state on enterprises get eaten by capitalism or acquired and so forth. So it's only about seven percent of the India Index. But another problem is that their biggest companies, the Infosys, Tata, these companies that are about twenty percent of the index and the largest holdings, they're not really

you know, capturing the India growth story. They get almost one hundred percent of their revenue from the Fortune five hundred, you know, doing outsourcing for US companies. So if you take that twenty percent and the seven percent, SOEs, Yes, India is going to grow a lot, but I think if you really want to capture the growth, there's a better way to do it than just to buy the traditional broad index that you know is usually the problem in emerging markets.

But what's the problem. I guess you're going to probably be a little bit redundant. But do you think people should add on to their Emerging markets ETF with I NQQ or don't even buy an emerging markets ETF and go pick just tech versions of these countries.

pe looks really low. But if you look underneath the hood and you see the Agricultural Bank of China and Petro Bra, you know, these government owned businesses that aren't on your side, I think it becomes clear that you don't you know, you know, you're not going to optimize your returns by buying the broad traditional index, and you have to get more targeted. That could be as easy as leaving out the ses. There's a large etf that is,

you know, merging markets without state owned enterprises. But I think that the real you know, the tip of the sphere of this, and you know, implicit in the word emerging is some sort of growth. And I can tell you with great conviction that where the growth is in India and in other emerging markets is in smartphones, in

the internet economy. And again it's this leap frogging effect that it's so powerful, and it's that leapfrogging the bank account and credit card, that first step that's the most powerful and important.

I mean, as mentioned the fundamental case, the biggest population, the youngest population, the fastest growing economy, a middle class that's exploding, the fastest growing e commerce market.

the highest in the world on a relative basis. And you know, Burton likes to use the the Schiller cape ratios, and I know that on his chart it's always the US first, India second in terms of valuations. And another thing that's happening is, as Rebecca mentioned, is there's a lot of money getting funneled into the index funds, into the ETFs. The government program is funneling a lot of money into that relatively narrow index. They're using the nifty to fifty, not the MSCI, which is what the US

largest ETF tracks. And so the valuations of the broad index are high, and the pe is you know, twenty one or twenty two. The earnings growth rate might be, you know, eleven percent, So you've got a PEG ratio of two ish or or higher. Actually, because they're actually on a revenue growth basis, the PEG ratio for the India broad market is about.

And that's another problem with Emerging Market Index is they don't seem to be paying attention to the Internet companies because a lot of them end up listing in the United States or you know, domiciling themselves outside of their markets where they're doing their business.