Brian Gaynor: Opportunities are knocking in India

China and India, with a combined population of 2.4 billion, are the world's emerging economic powerhouses.

China has outperformed India in terms of economic growth but this hasn't been translated into sharemarket returns. The Bombay Stock Exchange's sensex index soared 42.3 per cent in 2005 whereas the Shanghai Stock Exchange composite index fell 8.3 per cent.

In the five years ended December 2005, the Bombay market rose 137 per cent whereas Shanghai fell 44 per cent.

Although foreign investors can get access to better-performing Chinese companies through the Hong Kong sharemarket, India has proved to be a far more attractive proposition from an investment point of view. This is understandable as investor confidence is enhanced by the country's British-based legal and administration system, democracy and free and robust media.

As India is expected to be one of the world's most dynamic economies over the next 10 to 20 years, there should be plenty of profitable opportunities for overseas investors.

Where do these opportunities lie and how can New Zealand investors gain exposure to one of the world's most exciting economies?

India's recent history is relatively straightforward. The country gained independence on August 15, 1947, and Jawaharlal Nehru was the country's first prime minister until 1964.

Nehru admired the Soviet Union's economic policies and built a huge wall around the economy. This included the nationalisation of key industries, the suppression of the private sector and the introduction of a huge number of controls and regulations.

His daughter, Indira Gandhi, Prime Minister for most of the 1966 to 1984 period, and her son, Rajiv Gandhi, Prime Minister from 1984 to 1989, continued these policies.

The 1970s and 1980s were a depressing period for India as the Congress Party's socialist policies crushed the economy. The country was characterised by grinding poverty, overpowering bureaucracy and a stagnant economy.

Illegal money changing - the purchase of US dollars on the black market - was one of the few ways that enterprising individuals could make money.

The turning point came in 1991 when Rajiv Gandhi was assassinated during the general election campaign. The Congress Party won the election on a huge sympathy vote but immediately faced a financial crisis as the country's foreign reserves had plunged to just two weeks' worth of imports.

This allowed the new Finance Minister, Manmohan Singh, the former Governor of the Reserve Bank of India and the present Prime Minister, to introduce sweeping economic reforms. The crisis facing the new Indian Government in June 1991 was similar to the situation facing the newly elected Lange Government in July 1984.

The response of Singh was almost exactly the same as Roger Douglas in New Zealand seven years earlier.

The Indian economy has been transformed since 1991 although the country remains extremely poor by Western developed standards. There is enormous poverty in the cities and countryside and the roads are clogged with cows, goats, individuals on foot, camel-drawn carts, human rickshaws, bicycles, motorcycles and the famous Indian long-distance trucks.

But, just outside the cities, modern office blocks are appearing and the occasional shopping mall, selling well-known international fashion brands, is springing up.

India is on the move but it still has a long, long way to go.

The two main Indian stock exchanges, Bombay and the National Stock Exchange of India, have performed extremely well because Indian business leaders are creating shareholder wealth and they are particularly good at shareholder communications.

India is attracting a huge amount of direct and portfolio investment money from overseas.

In recent weeks, Oracle has said it will increase its Indian workforce from 8600 to 10,000, Microsoft will invest a further US$1.7 billion ($2.5 billion) in the country and go from 4000 to 7000 employees and IBM plans to raise its Indian workforce from 27,000 to 38,220.

Tony O'Reilly's Dublin-based Independent News & Media - largest single shareholder in APN News & Media, publishers of the New Zealand Herald - has bought a 26 per cent stake in Jagran Prakashan, India's largest Hindu language newspaper publisher.

The Irish company is expected to quadruple the value of its investment when Jagran Prakashan launches its IPO in the next few weeks.

The Indian stock exchanges had a net foreign inflow of US$10.7 billion in 2005 and US$540 million in the first 12 trading days of 2006. Oil & Natural Gas Corp, the country's largest listed company, doesn't attract much foreign investment because it is still 74.1 per cent owned by the Government and isn't listed on a United States stock exchange. As the accompanying table shows, the company has a market value of $56.4 billion compared with $11.5 billion for Telecom, the NZX's largest company.

Reliance Industries, which has two million shareholders, is a widely diversified company with interests in gas, oil refining, textiles, financial services and insurance, electricity and telecommunications. This week, the company began the process of demerging its telecommunications, coal, financial services and gas activities into four separate listed companies.

National Thermal Power Corp, which is 89.5 per cent owned by the Government, is one of the world's largest thermal electricity companies but Tata Consultancy Services, Infosys Technologies, Wipro Technologies and Bharti Tele-Ventures, which attract the most overseas interest, represent the modern face of Indian business.

Narayana Murthy and Nandan Nilekani founded Infosys in 1981 and they have nearly as much status in Indian society as cricketer Sachin Tendulkar. The Bangalore-based company, which has 50,000 worldwide employees, is one of the leaders in India's offshore outsourcing of software services with less than 2 per cent of its revenue derived from the domestic market.

Foreign investors are particularly keen on Infosys and it is 57.8 per cent owned by non-Indian institutional and individual investors.

Most economists have a positive long-term view on India and the country's businessmen have shown that they can create substantial shareholder wealth. As investors should have some exposure to emerging markets, India is a good place to start.

The problem is that New Zealand's bizarre tax laws make it difficult to invest in emerging economies.

We have an unrealised capital gains tax on all overseas investments, with the exception of seven exempt grey list countries. As India is not a grey list country then any direct investment from New Zealand is subject to an unrealised capital gains tax.

An investment in an Indian company through a fund manager in a grey list country is not subject to capital gains tax and thus our tax regime encourages individuals to invest in non-grey list countries through overseas-based pooled funds.

Many British or US-based funds invest in India, and the US$415 million JP Morgan Indian Investment Trust is one of the more popular and successful. The trust's share price has risen 65 per cent in the past year and 321 per cent since the start of 2003.

Infosys is its largest holding, representing 8.2 per cent of the trust's assets and it has stakes in Bharti Tele-Ventures (4.6 per cent), Wipro (4.1 per cent), Reliance Industries (3.6 per cent) and ITC (3.2 per cent).

There are too many different ways to invest in India to be covered in this column. Investors who want exposure to India and other emerging markets should contact their broker for advice on the most appropriate investment vehicle.


* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.