Why India is a Better Investment Than China

Misallocation of resources and outright fraud are two major problems in China.

We’re all familiar with the arguments for global investing. There are 117 stock markets outside our borders. At any given time, some market somewhere is almost certain to offer greater profit potential than New York — probably quite a few markets, in fact.

If you latch on to these emerging markets in the early stages of an upswing, you can reap a bonanza.

However, as I’ve said before, the current global bull market for stocks is no longer a youngster. It’s 27 months old, and showing signs of age. For example, many bourses around the world have skipped a beat lately over the prospect that high prices for oil and other raw materials might crimp economic growth.

In this mature phase of the market cycle, we want to own countries (and companies) with the ability to keep growing even if global headwinds pick up.

Growth on a Giant Scale

On emerging market that fits the bill is India. By the standards of the industrialized world, India is still a poor country. GDP per capita, according to International Monetary Fund figures for 2010, amounts to only $1,265, less than a third that of mainland China ($4,382).

But India has some advantages over China. It’s a democracy, with free and open debate. The legal system, while creaky and inefficient, is based on English principles. The Chinese economy, by contrast, is riddled with government-mandated misallocation of resources, as well as outright fraud in the private sector. I’m leery of most Chinese stocks listed on U.S. exchanges.

India, on the other hand, seems to be grappling more or less honestly with its problems, and making progress toward solving them. To curb inflation, the central bank has repeatedly jacked up interest rates over the past year. (The key overnight rate stands at 7.25%.) And yet, the country’s “real” (inflation-adjusted) output of goods and services is still expected to grow at least 8% in 2011 – triple the pace of the United States. Recent local elections also cemented the leading position of the business-friendly Congress party.

How good a value are Indian stocks? Not the screamer they were at the March 2009 low, obviously. However, the blue-chip Bombay Stock Exchange index (Sensex) is quoted these days at less than 15 times estimated year-ahead earnings. Over the past 20 years, the forward P/E on the Sensex has averaged about 18 times. So the market appears to have at least as much upside to fair value as, say, the NYSE does, with greater long-term growth potential.

For safety, I prefer to own a basket of Indian stocks via an exchange-traded fund (ETF). I like the India ETF PowerShares India Portfolio (NYSE: PIN).

If you want to shoot for bigger gains with individual stocks, you might consider one of India’s premier growth enterprises, car-and-truck maker Tata Motors (NYSE: TTM).

Auto manufacturing a growth business? Maybe not in the United States or Europe, but India is a world apart. TTM’s April sales ran 72% ahead of two years ago. Profits have quadrupled in the past five years. From the tiny Tata Nano to the Jaguar/Land Rover luxury brand, which TTM acquired in 2008, this outfit boasts a complete product line catering to Asia’s rising consumer class.

Yet the stock remains incredibly cheap at only 7 time estimated FY 2012 earnings (ends March 31). I say slide in behind the wheel and feel the power!