India’s place in the emerging markets segment - its strength

Emerging markets are now in a secular bull market and we expect this trend to continue into 2011, with significant corrections along the way.

We believe that even more money will be directed into these markets as investors around the world are beginning to realise that emerging markets are growing three times faster than developed markets, have more foreign reserves and lower debt-to-GDP ratios than developed markets.

By Mark Mobius

Moreover, the search for higher returns in a low-interest rate environment coupled with attractive valuations in emerging markets could continue to support equity prices.

Although the economic slowdown had an impact on some emerging markets, they are becoming more domestically driven. Government expenditure in infrastructure, as well as private domestic consumption, has at least partially offset the decline in GDP growth resulting from decelerating export growth.

 The services sector has also been gaining in importance, especially in China and India.

Meanwhile, the accumulation of foreign exchange reserves puts these economies in a much stronger position to weather external shocks, compared to about 10 years ago.

For example, foreign reserves in China are the largest in the world, totaling more than US$2.6 trillion. Similarly, Russia has more than US$400 billion, while India and Brazil have more than US$200 billion each.

India, in particular, does offer an exciting opportunity for investments, given the strong growth rates, rise of many new businesses and the quality of entrepreneurs.

Its huge consumer market is another important factor, which should support the market’s recovery in the future.  Over the long term, the growth rate of India may offer a good platform for Indian companies to deliver strong results.

India has one of the largest populations in the world and thus represents a huge consumer market. Moreover, with half of India’s people under the age of 25, they should be able to support their aging sector. So, India will continue to have both a strong labour force and a large consumer base.

In addition to strengthening consumer spending, India benefits from the availability of skilled manpower and excellent managerial talent, which provides it with an edge in the service sectors.

 Infrastructure development is another area that could also contribute to the recovery of the economy. India’s relatively strong fundamental characteristics and the accumulation of foreign exchange reserves also puts the country in a much stronger position to weather external shocks.

Towards the end of 2010, India experienced a wave of corruption scandals. That led to some political upheaval and brought into focus the corporate government relationships.

Cleansing the system may cause near-term issues which may dampen sentiment.

However, longer term it would ensure that India moves on a more sustainable growth path and could lead to a more positive investment climate.

In 2011, emerging economies may face inflationary pressures from the capital inflows spurred by continued loose monetary policies in developed markets and their efforts to contain appreciation of their currencies by purchasing US Dollars.

Money is flowing from developed markets trying to kick-start their domestic economies to emerging markets like Brazil, China and India, where authorities are trying various methods to prevent their own economies from overheating. With commodity prices on an uptrend, we believe this is going to be a continuing challenge to these countries.

In order to “equalise” these opposing economic trends, the requirement will be a gradual restriction in monetary expansion, an elimination of non-productive spending (reducing government activities) and less borrowing by deficit nations. (Source Economic Times)