How to Play Emerging Markets Now

Barron’s cover (week of 11/25) article about emerging had quite a few tips about what some of the money managers are buying in India. Stocks mentioned are - HDFC Bank, PC Jeweller, Titan, IndusInd Bank, Interglobe Aviation and Emami.

Ishida: We picked up Indian skin- and hair-care company Emami [HMN.India] in late 2011 because it was a better value than Dabur India [DABUR.India], the go-to consumer staple at the time. We recently sold Emami because it became very expensive, trading at 60 times earnings. Indian consumer staples are so loved by global investors it is very difficult to find a replacement.

  • About GST -

Eidelman: Eventually, the reforms should cut down on tax avoidance and take the sand out of the gears of commerce. India also recently said it would recapitalize the state banks [to deal with bad loans]. About 70% of the banking sector can’t lend, which has hampered investment in the country, so that is an important step. That said, markets have priced in a decent amount of this.

Eidelman: Take the national ID. It slashes customer-service costs for banks like IndusInd Bank [IIB.India] because now it doesn’t have to send a fellow out to the townships where there are no street names to sign someone up. Now that costs are much lower, the banks can target some of the country’s large, unbanked population.

Schwab: We own jeweler Titan [TTAN.India]. Its shares have more than doubled this year, but the company benefits from the GST, which will force mom-and-pop competitors to pay taxes.

Ishida: Titan is a quality company, but it’s very expensive. PC Jeweller [PCJL.India] is a smaller alternative. Sales growth will pick up over the next five years as it gains market share. About 70% of the jewelry business is unorganized, which means they don’t pay taxes; that’s a huge advantage. The GST will drive those unorganized mom-and-pops out. I’m not sure Prime Minister Modi wanted to do that.

Jain: That’s an important point. About 90% of Indian employment is unorganized. The idea of everyone paying taxes looks wonderful sitting in an Ivy League tower, but on the ground, business is slowing and affecting corporate earnings.

  • About near term risks -

Jain: I have had as much as 30% of the fund in India in the past; today it is 6%. Earnings growth has slowed dramatically in parts of the market like pharmaceuticals, information-technology services, and staples. And once India recapitalizes the pubic-sector banks, the private-sector banks will see competition return, potentially hurting net interest margins or pushing them to make riskier loans. Another potential risk: Almost all the credit growth is coming from consumer retail. In three to five years, the private-sector banks are more likely to see a credit cycle than not. I still like HDFC Bank [HDB], which is the best of the bunch, but others have already seen nonperforming loans rise.

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