Unlock the potential of India's burgeoning market with us, Steve Davenport, and my insightful co-host Clem, as we traverse the vibrant investment landscape of this emerging market. Our in-depth analysis of India's accelerating economic growth and how its' expanding middle class is revolutionizing consumer and industrial sectors. We tackle the dense forest of geopolitical dynamics, shedding light on India's strategic posturing amidst international tensions, while also celebrating the country's human capital, bolstered by a robust education system. Join us in deciphering how India's diverse industry sectors can fortify your investment portfolio against the winds of global uncertainty.
Feel the pulse of India's financial heartbeat as Clem and I share candid experiences and practical advice for navigating investments in Indian stocks and ETFs. This episode peels back the layers of the semiconductor supply chain, revealing its critical link to national security and India's potential rise as a semiconductor titan. We compare the lure of the Indian market to the volatility of currencies and weigh the merits of ETFs like INDA against familiar markets such as the S&P 500. Whether you're a seasoned investor or just starting out, this exploration of India's economic landscape is an essential guide to understanding and capitalizing on the opportunities within this dynamic market.
Unlock the potential of India's burgeoning market with us, Steve Davenport, and my insightful co-host Clem, as we traverse the vibrant investment landscape of this emerging market. Our in-depth analysis of India's accelerating economic growth and how its' expanding middle class is revolutionizing consumer and industrial sectors. We tackle the dense forest of geopolitical dynamics, shedding light on India's strategic posturing amidst international tensions, while also celebrating the country's human capital, bolstered by a robust education system. Join us in deciphering how India's diverse industry sectors can fortify your investment portfolio against the winds of global uncertainty.
Feel the pulse of India's financial heartbeat as Clem and I share candid experiences and practical advice for navigating investments in Indian stocks and ETFs. This episode peels back the layers of the semiconductor supply chain, revealing its critical link to national security and India's potential rise as a semiconductor titan. We compare the lure of the Indian market to the volatility of currencies and weigh the merits of ETFs like INDA against familiar markets such as the S&P 500. Whether you're a seasoned investor or just starting out, this exploration of India's economic landscape is an essential guide to understanding and capitalizing on the opportunities within this dynamic market.
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Steve Davenport:
Hello everybody, this is Steve Davenport. Welcome to the Skeptics Guide to Investing. Today, Clem and I are gonna talk about investing in India's markets. Clem has considerable conviction for investing in India. I, however, am a little bit skeptical. Clem, most people invest in emerging markets as an asset class and don't pick individual countries. Why do you think it makes sense to be discriminating and picking an individual country or two?
Clem Miller:
So, Steve, that's a great question. I think the answer that I would give to that question is that emerging markets, while it's a conventional asset class that people have been talking about since the 1970s, is really something that includes a whole bunch of disparate countries. So you've got China in that index with its peculiarities, which we'll talk on another podcast. We've got Korea and Taiwan, with their emphasis on technology and semiconductors. You've got countries like Russia obviously very distinct set of circumstances with regard to Russia and Turkey. You've got Brazil, which is a sort of classic middle income, large, diversified economy, but with considerable metals and other kinds of commodities associated with it. South Africa, also commodity oriented, and then you've got India, which we're gonna talk about more on this broadcast. So it's a wide variety of countries and I don't think you can kind of lump them all together into one category. I'm personally quite comfortable with the idea of picking one or two of these things and investing in them rather than investing in the entire group.
Steve Davenport:
I like that idea. I'm just trying to understand the question about why India they don't necessarily think of it as a stellar investment destination, with the level of poverty and the uneven wealth distribution, and yet you think of India as a good place to invest. Why?
Clem Miller:
is that. So India has had over the last few years, rapid, in some cases double digit economic growth, and you start off at a low base and the rate of growth is actually quite rapid from a lower base, which is sort of unlike the situation with the US or Europe or Japan or even China. Now you're starting off from a higher base. India is starting off from a lower base, has much more rapid growth, which creates more opportunities for investing. So, yes, it's a country with lots of wealth disparity, it's a country with a lot of poverty, but it's also a country with a rapidly growing middle class which supports consumer goods, which supports industrial development. So it's a country that is basically on the move, so to speak, and one that I think should be not just buried in an index of emerging markets, but one that should be emphasized.
Steve Davenport:
No, I think the human capital in India is a force to be reckoned with and you can see that from all the offshoring that's gone on in the US to client service centers in India, and I think that their educational system and a lot of other things make them a good place to invest. I guess I'm a little bit concerned with how they've responded to the Ukraine invasion, and it feels like they are supporting Russia. They are in the camp with China and Russia and, I hate to say this, Clem, but I think it may have something to do with oil and not with the rights and the privileges of the Ukraine people. Do you see a problem with the Indian government's positions making them less likely to invest?
Clem Miller:
So my thought on India in terms of geopolitics is that they have a position where they're trying to play multiple sides in the geopolitical game. So, yes, okay, they're looking at the need for certain natural resources, particularly energy, which they don't have a lot of, and so they're looking towards the Gulf states. They look, in particular, towards Iran for oil, they look towards Russia for oil. So they need energy resources for a rapidly growing economy, no question about it. That's what's driving their kind of neutral stance towards Russia. Now, on the other hand and there isn't on the other hand here they tend to be less favorable towards, much less favorable actually, towards China. So, with regard to China, there is an informal grouping of countries that was set up to be a counterweight, let's say a political, military counterweight to China, called the Quad, and the Quad includes the US, Australia, Japan and India, and it's the first time that I'm aware that India has been considered part of a sort of a US led anti-China grouping, and so India is certainly a part of that Quad. Also I ndia has exhibited opposition towards the China's Belt and Road Initiative, which is an initiative to try to link lots of Indian Ocean and African countries into a China led trade network. India has been opposed to that. India has had various trade disputes with China. India's had problems with China making investments in India.
Clem Miller:
So I don't see an India China alliance in the future. I see India as looking out for its own interest in terms of developing commodity inputs. Like I said with regard to Russia in particular, and I don't see any connections between apart from oil with Iran. I don't see anything with regard to North Korea, which would also be part of that axis of evil, so to speak. So that's how I'd break it down. I think India plays all sides. I think they're much less interested in developing relationships with China than they are with in trying to preserve natural resource flows, especially oil, from Russia.
Steve Davenport:
Yes, I think it's interesting how the situation evolves as we start to see A pple considers relocating out of China, and India seems to be the source that they move to in terms of manufacturing in the region, and I think that must have hurt China in terms of their economic base. T hey wanted to obviously keep as much of the Apple manufacturing business as they could. And I think it's interesting when we try to understand the India stock market. It's highly diversified by industry. It's not like some of the other East Asian countries, more heavily weighted towards technology. Do you consider this industry diversity a positive or a negative?
Clem Miller:
Oh, it's definitely a positive. If you look around the emerging markets, you see basically two countries, two larger countries that are diversified in terms of sector lots of finance, lots of industrials, consumer discretionary, consumer staples, some technology, but not overwhelmingly technology and these two countries are Brazil and India, and so they're quite diversified economies and their stock markets are quite diversified as well in terms of industries. So when you invest in those markets India and Brazil you get the country benefits of country growth, but you're not taking large sector bets. At the same time, you're not exposing yourself to sector bets. On the contrary, when you invest in China we're going to have a podcast about China You're more exposed to certain sectors that have seen government interventions. In Taiwan. A good chunk of that index has to do with semiconductors, so you're exposed to some of the geopolitical risks around semiconductors. And then you got other countries that are commodity price takers, such as South Africa. So I think that the diversification offered by India and Brazil is very merit worthy for investing.
Steve Davenport:
I like the fact that they're balanced, but you bring up the word that is where I have my trouble which is geopolitics playing a role in your thinking. Do you think that the world supply chains from the US companies are going to be increasingly routed through India or Indonesia? Or who is next to India in this geopolitical world going to be a challenger to China and others as we try to decide between the good, the bad and the ugly of markets and emerging markets?
Clem Miller:
So, when it comes to supply chains, I would say that there's really sort of two dimensions to this, and it's not quite three-dimensional chess, but it's two-dimensional. One dimension is the fact that some kinds of supply chains take a long time to move. So, for example, the one that's the most difficult to move is semiconductors, because you have longstanding relationships between semiconductor design companies, semiconductor equipment manufacturers and the fabrication plants, such as Taiwan Semiconductor, and it's nearly impossible to build a new Taiwan semiconductor outside of Taiwan in any kind of a short time period just impossible to do that. So some supply chains take a long time to move. On the other hand, there are other supply chains, like, for example, with critical minerals, where it can move pretty quickly.
Clem Miller:
One thing I learned relatively recently is that rare earths and a lot of other critical minerals that are used in renewable energy and electric vehicles and semiconductors and whatnot, they're actually quite common, commonly distributed around the earth. The reserves are commonly distributed, but the production is not, and so it's just a question of being able to gear up production outside of countries like China or in Africa and developing these in more friends-shoring, what they call friends-shoring. So Canada well, the US certainly, but Canada, australia, these are countries where obviously the US would like to have more mineral development and because these are commodities, these supply chains are easier to move than are the supply chains associated with higher value added equipment like semiconductors. So I would say that-.
Steve Davenport:
I think we've seen from Huawei, yeah Huawei that all of a sudden the issues about who's on, who's networked and who could be using that access to networks to eventually provide their home country with information has sent up a pretty bright flare in the sky. We have to start thinking about our chips and I think that it was very interesting to see how quickly we could look at Huawei and see it immediately get into the headlines as a chip provider, when in reality there's lots of chip providers out there but their position in the networks is critical, and I think a lot of other people are starting to look at all the points in the supply chain that somebody could disrupt with any kind of action against the company.
Clem Miller:
Yeah, one of the things that the Biden administration has been doing over the last couple of years is tightening the screws on the semiconductor supply chains. They don't allow US citizens to go over there and help Chinese semiconductor development. They don't allow in connection with the Japanese and the Dutch. They don't allow the export of semiconductor lithography, the etching equipment, laser etching to go to China. We should probably leave this stuff for China. Yeah, we'll talk about it with China. But yeah, the thing about India is that it's starting off. We're talking about a blank slate here on some of these things, and so it may take a while for something like a semiconductor industry to develop in India, but certainly it's a place where it could happen and certainly diversification out of Taiwan and East Asia is a good thing. I know people would prefer to have it come back to the US US policymakers would, and European policymakers the same for Europe, but I think that diversification into India is not such a bad idea either.
Steve Davenport:
Yes, I understand it's not easy from a regulatory standpoint for somebody outside India to invest in individual Indian stocks. How do you think you should be getting your Indian exposure?
Clem Miller:
Well, first of all, let's talk about that difficulty in investing in India. India has a heritage of being an overly bureaucratic state, to say the least. They take the old British you require a stamp from every office in bureaucrat and they've taken it to an extreme in India. The same goes for stocks there. I can understand they have a concern about too much foreign control over various aspects of the economy. They want to make sure they understand what's going on and the way to do it is to regulate. So I understand that.
Clem Miller:
So there are some ADRs for Indian stocks and for our listeners, an ADR American Depository Receipt is an indirect way of investing in a stock in a foreign country. So there are some, but not a lot, not like there are, for example, with China. So the best way to invest in China in a diversified way is to invest in India ETF and there are some out there. I personally invest in INDA, which is one of the iShares ETFs. It tracks the MSCI India index that MSCI has out there. It's diversified across various sectors and we were talking about before about sector diversification and I hold a small percentage in that index, given my portfolio in that index ETF, because I do have conviction in India.
Steve Davenport:
So how was the Indian ETF perform relative to the overall emerging market ETF?
Clem Miller:
So I don't have the overall emerging in front of me right now, but I do have the S&P and the India ETF. Inda has returned 57.79% over the last five years 57.79%. Over the last three years it's been 31.43% and over one year it's been 15.04%. So compared to the S&P 500, each of those is a little bit S&P 500 five years 101.95%. Three years 33.65%. One year is 25.01%. So it's less than the S&P 500. But the reason for that, as we all know, is that S&P 500 returns, especially recently, have been boosted significantly by what we refer to as the Magnificent Seven, and that's highly concentrated. So an emerging market country like India with diversified sectors to do as well as it's done. I'm going to just compare this to China. I know we'll talk about China on a different podcast, but with all those positives in India, I'll repeat again five year 57.93, year 31.43, one year 15.04, compared to China five year minus 16.54, minus 46.93 for three years and minus 12.88 for one year. I mean it's just a startling difference in performance between India and China.
Steve Davenport:
It's nice to see money move where it's treated well. Yeah, exactly, are you concerned about currency risk and how the evaluation of the rupee would impact Indian stock performance in dollar terms?
Clem Miller:
Well, I'm glad you asked that it's you know, obviously it's one of the, the negatives that we would see with regard to, you know, really any emerging market and and the thing about India is that it is a. The Indian stock market is highly domestic in terms of the components to the, to the index, and so you don't have a lot of companies that earn from exports. On the other hand, they don't import a lot either. So what happens is they, you know, india, you know, being a domestic market.
Clem Miller:
When you translate the domestic rupee returns into dollars, there can be a negative impact from currency devaluation. So that's why currency devaluation, you know, is always a concern, but it's a concern, you know, not just with emerging markets, it's also a concern with developed markets as well. I mean, we've seen large swings In the, in the euro against the dollar. We see large swings with the pound sterling. You know, after Brexit, for example, that was a significant issue. So, you know, currencies, currencies always an issue. But if you have, if you have returns like, I mean, these are the returns I stated before, the fifty seven point seven, nine, over five years, that's in dollar terms, right, that's dollars. So you know, that's what you get as a dollar investor, and so, yes, I think one should be concerned about it. But is it a reason not to invest in In an India? I don't think so.
Steve Davenport:
Yeah, that sounds great. Let's open our mail back. Here's an interesting question If you had to pair India with another emerging market and we wanted to only pick two, which one would that be?
Clem Miller:
I Already sort of hinted at that a bit. I would say that Brazil is the second emerging market to add to, to add to India again, it's a. You know, it's another diversified market where you're not having to take too much of a guess on commodity prices. It's in a different part of the world Latin America, of course versus India, it's a. It's a country where, just like India, you have you know something of a Democratic you know asterisk, okay, democratic government. You have a, you know, an established rule of law, obviously different. India's common law Brazil is civil law. You have.
Steve Davenport:
You know, yeah, I like the natural, natural resources element of Brazil, and I like the fact that it is in a different Zone economically. I think, though, both of those things are great reasons to be there.
Clem Miller:
I guess they're complimentary.
Steve Davenport:
Do you think there's any reason why we put one India first, or Brazil first, or do you think that they're both Equally good options for people to consider?
Clem Miller:
So I would say that the reason to put India first is because of its rapid economic growth. It's coming from a lower base, it's got longer to go. There's longer runway for market appreciation In India than there is in in Brazil. There is a there is a theory that the economists have which I tend to ascribe to call the middle income trap, and you know, I think it's. I don't know that Brazil is in the middle income trap or not, but Brazil is a middle income developing country. So I think you could sort of question you know, is Brazil going to be become an upper income country or not, or are they going to stay in some kind of middle income status?
Clem Miller:
I don't know how much more you know real GDP growth. It'll have real GDP growth and it'll likely be in excess of what we see in developed countries, but I don't think it'll be anywhere near the the economic growth that we see in India.
Steve Davenport:
Was there some great insights, Clem, do you want to sum it up for us?
Clem Miller:
Well, I would say that just my summary would be that I personally invest in an Indian ETF. I like the fact that, among the various emerging market countries, that India is growing the fastest, that it's a diversified economy and diversified stock market. I think that it has lots of opportunities going forward. I think that it offers some prospects for diversification. In terms of what we're seeing on the geopolitical front, I would say, on the other hand, there are some currency issues. Not a reason to not invest, but you could see ups and downs on currency, impacts on returns. Then you've got this uncertainty about where India stands with respect to Russia in terms of bringing in the oil. Again, they're trying to play multiple sides. I don't see them, as I mentioned before, as an ally to China.
Steve Davenport:
Well, that's going to make them become friendly with us, then, right.
Clem Miller:
Well, it doesn't make them an ally of the United States. It's more like your enemy's enemy is your friend. That's exactly what I think is undergirding the India-US relationship.
Steve Davenport:
I think that's great. Again, the ticker is INDA for India ETF. Now I'm going to wrap it up and say thank you. I hope everybody check in for the next video.
Clem Miller:
So let me just say here since I think Steve is having a little cough here we really appreciate you joining in today.