Emerging markets are popular locales for developed market investors, as their emerging status makes them likely to experience massive percentage gains not seen in more stable economies. Of course, the flipside of this is that instability also means a more likely chance of an investment going bad, so caution should always be taken when investing in a young economy.
Of course, the essence of caution is knowing the dangers. That’s why Equities.com is launching a series dedicated to exploring the unique recent histories of different developing markets, so investors can have a better idea of the exciting, but certainly risky world of emerging market plays.
India Puts the “I” in BRIC
India might be often classified as an “emerging market,” or more narrowly a BRIC country, along with Brazil, Russia, and China meaning that India is a country on the cusp of being a fully developed economy. After all, India is the second most populous country in the world, and so many people certainly gives the country a lot to work with as far as advancing the economy goes.
But while it shares many similarities with its BRIC colleagues, India is certainly in a class of its own as an economy, and from an investor’s standpoint has its own unique strengths and weaknesses.
India’s (Recent) Economic History
No, we’re not going to discuss things from the dawn of trade in the Indus River Valley. Rather, we wanted to give a brief overview of India’s emergence as a world economic leader, starting with economic liberalization in the '90s.
In 1991 the country was forced to enact a series of reforms in compliance with an IMF bailout, which opened the door for foreign investment, and deregulation. The flood of foreign capital into the country, coupled with increased liquidity, caused India’s GDP to soar.
While this soaring GDP came at the expense of the Indian underclass, there was no doubt the country was becoming a major player in the world economy. From 1990 to 2010 GDP increased 15-fold. India looked poised to become, along with China, one of the next major world economic powers.
That optimism has been tempered. After a peak of 9 percent growth in 2007, the Indian economy began to slow slightly, before putting on the brakes in 2012.
India in Early 2013
India is a powerhouse in emerging markets, to be sure, but in 2013 they experienced one of their worst years on record. The country’s currency, the rupee, devalued at a breakneck pace earlier in the year, losing nearly a third of its value. In turn, offshore investment firms began pulling out of the currency, and a lack of faith further sunk the rupee.
The reforms that had allowed India’s economy to grow at unprecedented rates had also doomed it, as it was not prepared to handle the transition. Due to restrictions on bank licensing, domestic banks couldn’t open fast enough to enfranchise rural residents. Likewise, economic corruption ran ram-pant in an economy whose corporate governance laws hadn’t been significantly overhauled since the '50s.
Rajan, Reform, and Railing in the Rupee
In September 10 the Reserve Bank of India, the country’s central monetary authority, installed Raghuram Rajan in as its new chief. A respected academic not afraid to ruffle feathers, Rajan immediately made clear his intentions to overhaul the Indian economy and bring the country up to snuff – if not to full development, then at least the levels of its BRIC compatriots.
He began working towards curbing speculation on the currency, and issued new bank licenses to domestic banks to better serve “underbanked” underclass. He also sought to double the borrowing limit of banks, and in general promote liquidity and entice offshore investment to once again sink funds into the subcontinent.
As of October 2013, these reforms have not yet worked in righting the ship. Rajan once again hiked lending rates, proving that all’s still not well with the Indian economy.
Still Interested, Investors?
Of course, Rajan has been at his job a scant six weeks, so it’s still far too early to tell if they will prove effective. For an investor still interested in socking money into this emerging market, here’s some key companies to watch in India:
Financial – ICICI Bank (IBN) , HDFC Bank (HDB) , State Bank of India
Manufacturing – Tata Motors, Tata Steel, Jindal Steel
Energy – Oil & Natural Gas Corp Ltd., Indian Oil Corporation, Hindustan Petroleum, Coal India Ltd.
Conglomerate – Reliance Industries
Major Indian ETFs
WisdomTree India ($EPI)
Assets: $994 million
iShares MSCI India ETF (INDA)
Assets: $419 million
PowerShares India Portfolio ($PIN)
Assets: $365 million