India might be part of the ubiquitous BRICs acronym along with emerging markets Brazil, Russia and China. However, growth in this country has been anything but impressive in recent years.
And investors looking for growth should continue to steer clear.
Since this point in 2008, the closed-end India Fund (NYSE:IFN) is off almost 60% while the S&P 500 has reclaimed everything it has lost and squeaked out a small gain. More battered markets like China and Europe have at least bounced back significantly even if they have not recouped all of their losses just yet.
One of the oldest pure-play ETFs, the iShares S&P India Nifty 50 Index Fund (NASDAQ:INDY), is flat since its late 2009 launch vs. a 40% gain for the S&P 500 in the same period.
Although there are few individual equities that trade as ADRs on American exchange, the short list of those available do not provide any more encouraging results.
Major financial stock ICICI Bank (NYSE:IBN) is off 30% since 2008 and has underperformed all major U.S. indices in the past 12 months. India pharmaceutical company Dr. Reddy Labs (NYSE:RDY) is barely sitting on a profit in the past year vs. a nearly 13% gain for the S&P 500. Tech mainstays are even worse, with technology consultant Infosys (NYSE:INFY) down about 10% and small-cap online player Rediff.com (NASDAQ:REDF) down almost 60% in the past 12 months.
So what gives?
Well, bigger-picture, many have long predicted that India would catch up to China’s GDP growth rate and eventually pass the People’s Republic in overall GDP. But this has been painfully incorrect for more than a decade, and investors have started to doubt the India miracle.
India growth slumped to 6.5% in 2011 — it sounds like a good problem to have considering stagnant economic environments elsewhere, but it was a stark development in the subcontinent. That under-7% figure was the result of the worst one-month contraction in growth in the past 14 years.
This year? India is tracking just 5% growth and could record its lowest rate of expansion since 2002 and 2003 notched just 4% GDP growth.
This economic malaise has many root causes. Tighter monetary policy to beat back inflation is the most obvious. Also, bureaucracy and policy inaction have hampered growth, and a hostile investment environment characterized by a very public war against Walmart (NYSE:WMT) last year are just some problems India needs to iron out.
Even more disturbing? A Credit Suisse report last year revealed a troubling trend in India that shows individual wealth dropping nationwide — not growing. If you are investing in emerging markets based on the thesis of a booming middle class, then India is anything but a case study.
Until this changes, there are better ways to play India than to buy directly into the market. Western brands continue to dabble there where they can; most recently budget fashion retailer Hennes & Mauritz (PINK:HNNMY) — known in the states as H&M — said this week it was preparing to apply to enter India. Swedish furniture giant Ikea is also hoping to get into India soon, too. And despite a less-than-favorable environment for new market participants, there are indeed brands that are already big in India such as Yum! Brands (NYSE:YUM) restaurant Taco Bell.
Stick to the multinationals for now, because buying into India via direct equities or funds focused on the region could be a dangerous game as growth continues to cool.
- More on the death of the middle-class growth myth in India. (The Slant)
- India cannot recover without meaningful reform. (The Guardian)
- For balance, the Asian Development Bank is bullish on India. (The Hindu)
- Of course, India’s financial minister thinks so too … but would he say otherwise? (Forbes)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.