Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Profit from the BRICs Investing: India and China

Stock-Markets / Emerging Markets Aug 05, 2008 - 12:42 PM GMT

By: Money_Morning

Stock-Markets Best Financial Markets Analysis ArticleMartin Hutchinson writes: Global investors need to “hit the BRICs” – literally. Back in 2003, the Goldman Sachs Group Inc. ( GS ), eager to push its clients towards global investing – especially in the emerging markets – invented the acronym “ BRIC ” (Brazil, Russia, India and China) to represent the four emerging markets it believed were destined to become dominant economies in the years to come.


And we concur: The BRICs are four markets investors need to carefully consider as places to put some of their money.

That's why we here at Money Morning developed “The BRIC Report,” a new feature in which we'll periodically update you on the latest developments in each of the BRIC economies and stock markets, and highlight some BRIC-related companies you might want to look at.
In Part I of this report, we analyzed Brazil and Russia. Here in Part II, we examine India and China.

India Intrigue

Given that its stock market is down 23% this year, you're probably surprised to hear that India is my favorite of the BRIC economies . Even worse: India's torrid economic growth is throttling back a bit, and there are signs of a credit crunch.

But investors need to hear the proverbial “rest of the story.” You see: If India had no problems, its stock market would be trading at 40 times earnings – and not 18 times earnings, as it is now. In other words, India could well represent a “double” for investors with the courage to buy in now and stay the course.

Without a doubt India remains one of the world's great long-term growth plays, and investors today are likely getting in on the ground floor of a major long-term bull market .

India's economic growth was 9% in 2007, and will be around 8% in 2008, so the overall market seems reasonably valued at the current multiple of 18. If India can get its political and economic houses in order, it has some very real prospects for a couple of generations of rapid growth before living standards start to approach the West and growth rates slow.

In the short-run, however, there are some potential pitfalls to be aware of. The current Indian government, in office since 2004, is a coalition between the Congress Party, which had ruled India for most of the period since independence without any great success, and the anti-market Communists. Although Prime Minister Manmohan Singh is a moderate, the government has seen India's economic emergence as an opportunity to fund favorite projects and social programs.

The budget for the current fiscal year (ending next March) proposes an 18% spending increase, and that's after spending rose 24% last year. The state budget deficit (federal plus local) is around 7% of gross domestic product; in any kind of recession, that could easily spike to the 10% of GDP level at which deficits become difficult to finance.

There is hope on the horizon: An election is due in May 2009, at latest, and the center-right opposition is currently leading in the opinion polls. But wise investors know better than to base their investment plan on something as uncertain as that.

India's other big problem is inflation, currently running at 8% per annum, which is higher than short-term interest rates. Higher commodity and energy prices have affected India as they have other countries; India's position is made more difficult by the poverty of much of the population.

The Indian government has restricted exports of rice and has subsidized other foods and gasoline (the latter makes no sense socially since automobiles are largely owned by the middle classes).

Needless to say, these subsidies and restrictions make the budget deficit worse, and will pose an additional problem when they are lifted and newly unfettered consumer prices soar in response.

Growth has now acquired huge momentum, and any conceivable Indian government will do no more than slow it temporarily. Furthermore, the economics of the contracted-out customer support and manufacturing services that India has built into a national mainstay – in the era of globalization and the Internet – is so compelling that it will inevitably continue to produce huge profits for decades to come. The question is not:
“Should I invest in India?”  It's actually: “How can I afford to ignore India?”

And the answer is:  You can't.

Stocks to consider would include Infosys Technologies Ltd . (ADR: INFY ), the Bangalore-based software giant, which seems pretty invulnerable to Indian or global recession and is selling at a fairly reasonable 19 times current earnings and 20 times next year's earnings.

Another possibility is the pharmaceutical company Dr. Reddy's Laboratories Ltd. (ADR: RDY ), a major generic drugs manufacturer that can expect to benefit from the expiration of many U.S. pharmaceutical patents in the next five years, and carries a fairly reasonable forward P/E ratio of 23.

Finally, you might consider India carmaker Tata Motors Ltd. (ADR: TTM ), whose shares currently trade at about 8.5 times earnings. In the luxury end of the market, Tata recently bought Jaguar and Land Rover from Ford Motor Co. ( F ). And at the bottom end, Tata has grabbed global headlines with its $2,500 Nano , a car that's 40% cheaper than anything else on the world market.

Charged Up Over China

As we've pointed out repeatedly, China is a huge opportunity: It's already the third-largest economy in the world after the United States and Japan, and it quite possibly could be the world's largest by 2025. Its stated growth rate is even higher than India's, although Chinese economic statistics are pretty suspect. Nevertheless, apart from the qualms raised by the Chinese market's six-fold increase in 2006-07, and current high valuations, there are significant weaknesses that should not be ignored.

The two biggest: China's banking system and its high rate of inflation.

China's banks were for years used as a piggy bank for state-operated industries, many of them major money-losers and some that were technically bankrupt. Instead of the state recording budget deficits by subsidizing rubbish, the banks would lend the money to the bad companies, recording them as current loans. The result was a mountain of bad debt in the Chinese banking system. Back in May 2006, Ernst & Young estimated the bad debt had reached $911 billion (an estimate Ernst and Young was forced to withdraw; after all, they do have a substantial auditing business in that country!).

Encouragingly, Chinese authorities are beginning to attack this problem: An estimated $130 billion of the country's $200 billion sovereign wealth fund has been used to recapitalize parts of the banking system. Since China has $1.68 trillion of foreign exchange reserves, and the bad debts are presumably still only $1 trillion or so, China does have the financial wherewithal to solve the problem. However, using FX reserves to recapitalize the banks would be highly inflationary, providing an almost 50% increase in the money supply.

That brings us to the next problem: Inflation, which is rising sharply. China's official inflation rate for the year ending in May is 8.3%, but the actual inflation rate is believed to be much higher.

China's yuan has been allowed to appreciate against the dollar to combat this, but the real need is for higher interest rates, which are still below the inflation rate. It seems inevitable that China will suffer some kind of tight money crisis, in which the banking system is recapitalized and inflation conquered, while the real economy suffers accordingly. However, such a crisis has appeared inevitable for several years now, and it hasn't happened yet.

Whether or not China suffers a short-term crunch, its long-term prospects are excellent. Its stock market remains highly illiquid, since much of the market capitalization represents state controlled companies, of which only a small portion are publicly traded. Given the problems in the banking system, financial services should be avoided, while P/E ratios in many other sectors are far above what would be considered appropriate in the West. Nevertheless, with the 30% fall in the Chinese market since last November, there are now some bargains to be found.

  • CNOOC Ltd. (ADR: CEO ), China's major international oil company, is selling at a P/E ratio of about 15.  Most of its exploration activity is concentrated in China's offshore region, but it also has operations in Australia, Indonesia and Africa. CNOOC is central to China' search for oil resources, and critical to its future growth.
  • Yanzhou Coal Mining Co . (ADR: YZC ), China's largest coal miner, is rapidly ramping up production to meet soaring worldwide demand for coal: China alone is commissioning one new coal-fired power station per week. Selling at 17 times current earnings but only 12 times forward earnings, Yanzhou is benefiting from soaring coal prices, as well as rocketing demand.

Both CNOOC and Yanzhou are major, state-controlled behemoths. For a venture into China's true private sector, consider a look at a medium-sized company that is active in generic pharmaceuticals in what is potentially a huge market in China for such products. That company is Simcere Pharmaceutical Group ( SCR ). Its shares are currently trading at about 15 times current earnings.

[ Editor's Note : Part I of this “Special Report” ran both on Friday and yesterday .]

News and Related Story Links :

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in