Related topics: stocks, emerging markets, value stocks, China, Jim Jubak
It comes with the territory: When people I meet while traveling discover that I manage money and write about the stock market, they always ask, "What's your favorite stock?"
So it was no surprise that on my recent trip to India, conversations with U.S. or European travelers would take that turn.
What was surprising was the exact form of the question. What they'd ask, specifically, was for me to name my favorite Chinese stock. And we'd be off on a discussion of dairy-and-food company Bright Food Group, or Internet search engine Baidu (BIDU, news), or China Railway Construction.
In Mumbai, Kochi and Delhi, the question was always the same. Against a background of Mumbai's construction cranes, the surprising new high-rise skyline of Kochi and Delhi's ubiquitous ads for new schools of English, engineering and computer science, all that the Western travelers wanted to talk about was China.
Why aren't investors excited about India?
It got downright perplexing. In the midst of an economic boom that is projected to see India's GDP grow by 9% in the fiscal year that ends in March 2012, no one wanted to talk Indian stocks?
Jim Jubak
And after a while it led me to wonder, if investor indifference was so pervasive, could India's stocks be undervalued?
For the Indian stocks that everybody knows today, and from a short-term perspective, I think the answer to that is "no." The familiar names, and the ones that it's actually possible for investors outside India to buy, aren't especially cheap, even though the Indian stock market was down 3.9% in 2011 as of April 4 and down 6.2% from its November 2010 high. Despite that decline, shares of Tata Motors (TTM, news) still sell for 26 times trailing 12-month earnings per share. That compares with a trailing 12-month price-to-earnings ratio for Ford Motor (F, news), of 8.3. India's Infosys Technologies (INFY, news) trades at a trailing P/E of 30. In the United States, Oracle (ORCL, news) trades at a trailing P/E of 21.
From a long-term point of view, however, I think the answer to whether Indian stocks are undervalued is "yes." At least that's the perspective that I came back with after my recent visit there. While the Indian stock market as it now exists isn't a particular bargain, the emerging Indian stock market is. Let me try to explain.
It's easy to understand why Western investors, especially Western investors who actually have been to India recently, should be so cool to the country as an investment option. Its economy struggles to stay afloat in a tidal wave of bureaucracy. (I still don't have a clue why my wife had to supply our marriage certificate in order to get a visa.) Hopes that Prime Minister Manmohan Singh would use his second term to reform the country's rules on foreign investment, remove layers of subsidies that stifle efficiencies in sectors such as food production and transportation, and overhaul the country's education system have been dashed by a wave of scandal that has left the government focused on little beyond its own survival.
And maybe most of all, there's just the sheer chaos of India's day-to-day economy. Shops crowd upon shops. Market streets are constantly in motion, with everyone selling something to someone. On the highways, trucks co-exist with cars and tractors, auto rickshaws and the occasional camel-drawn cart in a system that works -- to the degree that it does work -- only because everyone leans on their horns at every opportunity. Temples are wedged next to roadside restaurants, next to factories and next to recycling shacks. One day I saw two barefoot women treading mud into brick next to a factory that made backhoes.
Most of us have a bias toward order and organization. And by that metric, the reality of India just doesn't score as high as that of China, its big competitor.
That bias, however, can sell India short. Take this example:
Auto rickshaws, little three-wheeled, go-cart-sized cars (you might also know them as tuk-tuks from Bangkok), fill the streets of Indian cities, providing cheaper alternatives to taxis and faster, more convenient alternatives to buses. It's tempting to think of them as primitive -- they sure look ragged -- and a sign of India's under-development.
