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India would be a smart pick for growth-oriented investors

by Wayne Cheveldayoff, 2005-07-28


With Canadians no longer fettered by a 30-per-cent foreign limit in RRSPs, the hunt is on for the best places in the world to invest retirement money.

Given its potential for rapid growth and its fair treatment of foreign investors, India should definitely be near the top of the list.

The opportunity to scour the world for growth was exactly what the federal Government had in mind when it announced in the 2005 budget speech that the foreign limit would be scrapped.

Investor groups had argued for some time that the restriction was unfair to Canadians trying to provide for their own retirement, given that so many opportunities were being missed as Canada represents less than 3 per cent of world stock market capitalization. Ottawa finally agreed.

Though they are both Asian powerhouses, India’s investment potential is more attractive in many ways than China’s.

Approximately 54 per cent of India’s 1.1-billion.population is under age 25 – a total 590 million people – a much higher proportion than in China where the one-child policy has meant an older population. Despite the larger, 1.3-billion population, there are only about 400 million under age 25 in China.

India has an enormous middle class of 300 million people – close to 10 times Canada’s population. India’s middle class is growing at 8 per cent per annum and key consumer products much faster.

While China’s economy has been growing faster at 9 per cent a year, India’s growth rate in recent years in the 6 to 7 per cent range is still double what can be achieved in Canada and the United States.

Furthermore, India’s economic growth is mostly internally driven, whereas China’s depends heavily on exporting, making India’s economy less vulnerable to untoward swings in international trade.

Economic projections to 2050 put India, with an estimated $27 trillion GDP then, as the third-largest economy in the world after China and the United States.

Perhaps most importantly, again in contrast to China, India has recently adopted North American-style intellectual property laws. This is attracting many world-class tech and pharmaceutical companies, which bodes well for future growth.

Canadians interested in investing in India fortunately have some choices.

Several large Indian companies have listed their shares on U.S. exchanges. Software and IT services giant Infosys Technologies is traded on the Nasdaq under symbol INFY.

Two of the country’s largest banks, HDFC Bank (HDB) and ICICI Bank (IBN), are traded on the NYSE.

There is only one India-focused equity mutual fund in Canada, offered by Excel Funds (www.excelfunds.com). The fund’s assets, currently around $80 million, are managed by India-based investment professionals employed by Birla Sun Life, a joint venture between Sun Life Financial of Canada and the Aditya Birla Group, one of India’s top five companies. Annual return for the Excel fund in the three years up to June 30 was 34.6 per cent, according to Globefund (www.globefund.com).

Alternatives include two NYSE-traded closed-end funds, India Fund Inc. (IFN) and Morgan Stanley India Investment Fund Inc. (IIF) – both of which recorded a three-year average annual growth rate of close to 39 per cent, according to a fund-tracking site called ETF Connect (www.etfconnect.com).

(The several India-focused equity mutual funds offered south of the border are only available to U.S. residents.)

The two closed-end funds and the Excel fund have similar mandates of investing for long-term growth. But on an apples-to-apples comparison taking into account the rising Canada-U.S. exchange rate, Canadian investors would have been better off in the Excel fund in the past three years since it produced about 10 percentage points more return annually in Canadian dollars than the U.S. closed-end funds, according to an analysis provided by Excel Funds.

This won’t necessarily be the case going forward, however, as the Canadian dollar is being restrained by deliberately low Canadian interest rates and therefore is much less likely to continue rising.

Anyone thinking of allocating some money to India at present should be thinking long term. The market has risen dramatically in the past three years and may be due for a rest.

Nevertheless, with India’s economic fundamentals and momentum so strong, any pullback in the overall stock market would likely be minor.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.


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©2005 Wayne Cheveldayoff