Investing in the Indian Equity Market is More Fun (and Profitable) than the US
I started investing in equities during my Freshman year of college. I was in love as soon as I understood that it was a way for me to own part of a company and I could end up owning parts of multiple companies at 19!(Beat that Zuckerberg!)
I knew that I wanted to invest in India because having grown up there, I knew exactly what kinds of companies I would like to own. However, I also wanted to bank on some of the opportunities that I had come across in the United States as I was working as a research analyst for a small cap fund. I got a job only so so I can could my SSN for the sole reason of being able to open a trading account.
However, over time, as I have gotten more experience, I have realized that a better strategy is to invest more heavily in India. Consequently, I have ended up at a place where over 90% of the stocks that I own are Indian and the rest of my portfolio is invested in the US. I do not pursue opportunities in any other regions because that would be outside of my "circle of competence".
Why do I think that India is more fun (and profitable) than the US?
Mispricing Exists:
It has become extremely difficult to find mispriced publicly traded companies in the United States as the market has become saturated with sophisticated institutional investors scrutinizing these securities with a better skill set and (sometimes) access to more information. There is also an increase in retail investors entering the market looking actively pick stocks. In such a situation, it has become challenging to find mispriced equity investment opportunities. Additionally, as Mohnish Pabria mentioned in a sumzero interview, the number of public companies listed on US stock exchanges has gone from 8000 to 3500 while the number of intelligent investors with increased capital (due to low-interest rates and fewer places to park money) have gone up leading to a diminishing pool of good business that are trading at a discount.
It is not like the good old warren buffet days where you could look through the newspapers and find statistically cheap stocks. With the advent of high-frequency trading and quant finance, it is almost impossible to find anything that would be statistically cheap.
In India, on the other hand, the market is not as developed and a lot of inefficiencies exist. Furthermore, when you have high growth there is a higher probability of mispricing since different people’s perspectives on growth can express itself as different outcomes in terms of price. There is also a tremendous use of technical analysis when it comes to investing since people continue to call brokers, to buy and sell equities, who make money based on volume, and hence a lot of the trading is based on technical analysis. Even the news channels have guests come and advice on stocks based on technical analysis which in turn leads to stocks being mispriced (by a lot!). Lastly, there is an increase of retail investors in India as well but most of them but the inflow is mostly in mutual fund securities and most mutual fund managers focus on only a select number of stocks. Even if these new retail investors are investing in individual securities, most of them are part the class that trades off of advice from news channels. Furthermore, the niche small to mid-cap space remains uncovered and provides a lot of opportunities.
Lastly, the level of education in these countries is very different and this reflects in stocks as well. A finance degree in the united states can teach you to invest independently and analyze and value stocks, which does not happen in Indian universities. One of my friends who has gotten a BCom degree with a concentration in Finance from a prominent Indian business school did not even know what options are or what a DCF is. Sophisticated investors in a market are inversely proportional to portfolio returns.
Predictable Future:
Investing in India is like living in the present knowing full well what is going to happen in the future. The only uncertainty is how and when, which is relatively easier to figure out. My friend and I used to joke that India is US - 50 years. Now I have realized that if you use that as your mantra for Indian investing, it can be quite lucrative. Industry trends that have already materialized in the United States happen in India a couple of years later and investing in the market leader in that industry, ends up being a lucrative bet.
Some examples:
- 4G in India is a recent phenomenon (Reliance Jio growth story)
- Electric Vehicles are still not a thing in India, companies have only recently started research and development in that space
- Streaming services have been popular in the United States with "Netflix and chill" being a thing for as long as one can remember, but that industry has also only recently started to get disrupted in India
So what's next? Mobile payments? Cybersecurity? Healthy beverages? Self-driving cars?
Growth Rate
The economy grows at a rate of around 7-8% while that in the united states grows at around 2-3%. Therefore, even if you park your money in a large cap boring old industrials stock in India, you'll be able to make high single-digit returns compared to a similar company in the U.S. where it will be close to low single-digit. Thus, the risk reward scenario is highly favorable. The inflation in the country is higher as well so one could argue that in the "real" sense, it is no different. However, if you live in the united states (like I do now), the math will be different.
Then why do I still have a portion of my income invested in the United States?
Technology
All of my US investments are in the technology sector. It is what the country does best and what the country does first. The sector has outperformed the S&P 500 and the tech "bubble" fears do not hold up.
There is a strong first mover advantage in the space and it is much easier to find "monopolies" with durable moats. There is also much more uncertainty when it comes to valuations, which makes it easier to find some mispricing. Since many of these technologies are new, the valuation is strictly forward-looking and if you have a view that is different from the markets', you can find several multi-bagger stocks. There are also a lot of good investments in the smaller cap space in particular. However, with fewer companies going public, it is definitely getting harder.
---
So yes, I do find Indian Equities more lucrative compared to American. However, in times like now when both markets have been on a bullish trajectory for a (very) long time and valuations are stretched, a correction is expected sometime soon and investing in cash and gold (though not much fun) could end up being fairly profitable.
No comments:
Post a Comment