What do you need for a growing economy? People, whose work will add value to the whole society, and stable, business friendly legal and tax environment. The list can go on, but these two are probably the most important pillars.
Can you name a country where these two were given for a long period in time? The United States is a great example. No wonder why the US stock market has become the world’s most important one. It was achieved from basically an emerging market status, where it was 120 years ago.
How about India? Well, from the two main requirements, the first one is definitely given.
One of the things why I am positive about India on the long run is its demography. Have a look at the age structure below:
This is a very healthy age pyramid, which (unlike many western countries or Japan, where the aging of the population will mean a big problem in the future) actually looks like a pyramid. It is a young society where plenty of new, active workforce will enter the Indian job market within the next 10 years and beyond (framed in red).
How about the legal and tax environment? In the past, this was definitely not the strong side of India. Nevertheless times seem to be changing. Since 2014, the Modi government has pushed through a lot of reforms, which have aimed to reduce corruption, whiten the economy and attract foreign investments. The famously complex Indian tax system is also getting simplified.
This is a long and difficult process, and definitely not without mistakes. As an example, last year the international press was full of news regarding the chaos that the withdraw of 500 and 1,000 rupee notes has caused. But even behind this step there was a good reason, namely reducing tax evasion and increase the transparency in financial transactions.
The recent reforms already have results and companies like Apple, Facebook, Google and Uber are already heavily investing in the country.
How to Invest in India?
Unless you want to invest in individual Indian stocks, the easiest way would be via an ETF.
You might think about choosing a worldwide ETF and you would immediately have some exposure in India. Nevertheless if you look closer, for example the Indian holdings of Vanguard Total World Stock ETF (VT) is just over 1.1%.
But even the Vanguard Emerging Markets ETF (VWO) has less than 12% exposure. This ETF might fit those better who prefer China (the total weight of China and Taiwan is over 40%).
However, these ETFs also have their own merit, namely the wider diversification and low fees. Nevertheless I’m searching for some pure Indian stuff here.
Searching for the Best Indian ETF
There are a number of options if you want to purchase a pure Indian ETF. Among these, iShares MSCI India ETF (INDA) looks like the most attractive one for me. For starters it has far the largest assets (over USD 5 billion) and this is also the most liquid one from the list.
It is also the cheapest one with a 0.71% expense ratio. This is still far more expensive than most other US and European ETFs out there, but this price seems to be the bitter pill to swallow.
It is quite a concentrated ETF, its top 10 holdings represent over 44% of the overall assets. In terms of the valuations, from the largest holdings there are some assets with P/E ratio in the mid 10s, but as an extreme, Hindustan Unilever is currently trading at a 52 P/E.
But how does the overall Indian stock market look like from a different perspective? One of Warren Buffett’s favorite indicator is the market cap to GDP. According to him, “it is probably the best single measure of where valuations stand at any given moment”.
In the US, the value of this indicator is over 130%. How about in India? Based on an article published earlier this year it is 74% (the record high was 149% in 2007).
Bear in mind that due to the different environments the results of the indicator might not be fully comparable between the US and India. But it might be enough to show that we are not talking about an extremely overpriced stock market, especially if you also consider the GDP growth forecast for the upcoming years.
It is very hard to say where the Indian stock market will go on a short term, especially after the rally of the recent months. But on a long term (and here I am talking about several years) I am very bullish on the country. Because of the reasons I mentioned above I have decided to include INDA in my portfolio and will keep on purchasing maybe on a quarterly basis.
At the same time I do not want to get over exposed in India either, and I’m not planning to have over 5-6% of it in my stock portfolio.
Do you also own Indian equities? If no, are you planning to add such investment to your own portfolio?
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Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on financial independence and early retirement.