Macro Tsimmis

intelligently hedged investment

BUY Blackstone India Fund (IFN)

Posted by intelledgement on Tue, 02 Jan 07

By most measures, India has fallen behind China in the race to modernize. Fifty years ago, both countries were essentially agrarian backwaters. India has capitalized on their English-speaking prowess (as much as 5% of the population is fluent including most high-level business people) to build a thriving services sector that is the jewel in the economic crown; the percentage of the population that makes a living from agriculture has declined from well over 80% to just 60%…but China’s progress has been even faster, with fewer than half their population (45%) still living on the farm. India’s growth has been fast and getting faster—8.5% GDP growth in 2006 and an average of 7.5% in the last ten years…but China’s has been faster and getting fastest—10.5% in 2006 and an average of 8.7% in the last 30 years. Chinese per capita GDP is now nearly $4000 ahead of India ($7600 to $3700 in 2006), which is particularly impressive when one considers that a decade ago, they were only about $1600 apart. The growth of India’s economy has enabled a laudable reduction in their poverty rate from 35% to 25% in just the last decade…but China’s poverty rate is now down to 10% of her population. China also has triple India’s oil reserves, and nearly quadruple her natural gas reserves…of course the population is larger…India had a current accounts deficit of only $26B in 2006 and healthy foreign exchange reserves of $165B which are good numbers, but China had the largest current accounts surplus on the planet—$179B—and foreign exchange reserves of over a trillion…the list goes on.

But you know what? Forget about China! India’s growth story may not be as spectacular, but it is none-the-less a great story…and it has a long way to run. Every day, more and more Indians are moving to cities, working in manufacturing or services, getting an improved education, attending movies, buying cars and cell phones and contracting with ISPs…in short, getting plugged into the 21st Century and expanding the size of the market. Every day, international trade—in goods and services both—become a bigger part of the Indian economy…and the Indian diaspora lends the country a huge advantage in finding and exploiting overseas opportunities.

Furthermore, in following a less frenetic path, India has not subjected herself to the same levels of societal, finanical, and environmental strain as China. There is corruption in India, but nothing like the “anything goes” atmosphere in China, which lacks judicial and democratic political institutions to enforce contracts and resolve conflicts. There are inefficient state-run enterprises in India, but nothing like the problems the Chinese face in that regard—to say nothing of the huge bad loan problems the Chinese banks face from their attempts to prop up badly performing state enterprises and inexperienced efforts to distinguish good credit risks from bad in the wild west environment of Han development in the last decade. There is pollution in India, but nothing like in China, home to seven of the ten most polluted cities on the planet.

Of course, there are significant risk factors. China is ahead of India developmentally, so a Western financial crisis that lead to an economic/trade downturn could be more detrimental for India, as their smaller middleclass/indigenous market would be less capable of taking up the consumption slack. A significant escalation in Hindu-Islamic tensions/terror or a conflict with Pakistan would not be good. India has not done such a good job on containing AIDS and if the virus spreads widely enough, it would become a material drag on the economy. On the remotely-possible-disasters front, a serious bird-flu epidemic could hit India hard, or if the global warming alarmists prove correct, significantly rising sea levels could potentially displace tens of millions. In general, it is fair to say that while any external problem that affects everyone is likely to hit India as hard or harder than China, she is less likely than China to suffer economic damage from self-inflicted wounds.

If it is race between a tortoise and a hare, well barring a sudden storm that sends everyone home early, the tortoise may yet prove victorious. You just never know what might distract and delay that flighty hare along the course of events…and the tortoise may be slow, but she’s most definitely steady. And in any event, in this race the prize for “show” is pretty darn good, so strategically, it probably makes good sense to bet on both of them.

Tactically, this is the only mutual fund in the portfolio, which otherwise consists of ETFs. Blackstone have managed this fund for ten years and during that time it has significantly outperformed the Indian stock market index. Typically, the fund is 80% or more invested in a broad range of Indian equities. As the IFN is a close-end fund, it trades during the day in the same fashion as an ETF. While we are familiar with this fund and comfortable with it, for the sake of consistency we are likely to replace it with an appropriate ETF once we have had an opportunity to research and select one.


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