During the slowdown, India’s construction came to a grinding halt, the luxury art market slowed and even the most educated of its population were having trouble finding employment.
During the boom years, India’s growth was attributed to large inflows of cash and investments, around 39% of GDP in 2008, with more than a third coming in from abroad. In the last 3 months of last year, foreign loan and direct investment plummeted almost a third.
The International Monetary Fund (IMF) has reported that Indian companies are among the world’s most exposed as a result of heavy borrowing. On the other hand, financial corporations in India weren’t weighed down by toxic assets, which wound up insulating them somewhat from the full impact of the global recession.
In the fourth quarter of 2008, the economy grew 5.3%, the slowest rate in five years. The government predicts a 6% growth this year while the IMF projects a 4.5% growth. There will be increased fiscal spending on infrastructure and social programs, and the Central Bank has reduced its benchmark interest rates.
A recent election, however, could reverse the country’s course. The day the Congress Party won the elections, the stock market shot up a whopping 17%. No wonder they were dancing in the streets. The victory raised hopes of a revival in foreign direct investment and economic growth, as well as tax reform and significant infrastructure spending.
Manmohan Singh’s win has given hope to a half a billion Indians that poverty isn’t a way of life.
Ways to Play India
China’s economy, while still considered “emerging,” is considered one of the world’s economic superpowers. It’s the second largest in the world, and as one of largest buyers of U.S. debt, the relationship we share is a significant one.
Many economists believe that China’s economy will be the fastest-growing one in 2009. While the country suffered in the economic downturn and saw massive job losses, it also forcefully reacted to the downward pressure with $580 billion stimulus spending package that by many accounts is working.
China’s Central Bank also stepped in and prioritized the maintenance of stable economic growth by relaxing monetary policies and ensuring sufficient liquidity. The bank also kept the yuan stable at a balanced level with a more flexible exchange rate.
In the meantime, China is trying to increase its influence with more overseas aid and loans, and top officials are setting up the country as the world’s next top economic power. There have been talks of a “Beijing Consensus” that might displace the Washington Consensus, which is a set of ten specific economic policy prescriptions that lays out how developing countries should manage their own economies.
While China is growing and powerful, there are still some hindrances to its growth: energy is insufficient to run at fully-installed industrial capacity; the transport system isn’t efficient enough to move mass quantities of critical items such as coal; the communications system isn’t able to meet the needs of a population as large as China’s.
One facet of China’s economy that might pay off in the long run is that consumer spending only makes up 35% of China’s GDP. The culture of thrift in China has caused massive amounts of household savings. But tax cuts and the government’s focus on infrastructure projects aims to help households. There is also a health insurance plan that would be provided to hundreds of millions more people over the next couple of years.
Ways to Play China
- iShares FTSE/Xinhua China 25 (FXI)
- PowerShares Golden Dragon Halter USX China (PGJ)
- SPDR S&P China (GXC)
- Claymore/AlphaShares China Small Cap (HAO)
How to Choose the Best ETF for You
If you are hungry for exposure to the BRICs and other emerging markets, ETFs can give it to you in a variety of ways, including two of the most common:
- Target a specific emerging market with a single-country fund, such as any of the ones listed above, which can potentially deliver higher volatility but greater rewards when they do well; or…
- You can choose a region or class of emerging markets with a broad-based fund, which spreads the risk and volatility over several emerging-market countries
As you decide which option works best for you, decide what your comfort level is, what areas are most interesting to you and how much risk you would like to take. It’s also important to watch the trend lines and look for those areas that are moving.
When you’re looking at a broad BRIC fund, it’s important to look at the allocations. None of them have an equal weighting across all four countries. In fact, most of them allocate at least one-third to one country, while the rest of the countries are spread out among the remaining two-thirds.
Ways to Play the BRICs
- iShares MSCI BRIC (BKF): Brazil, 27.4%; China, 23.5%; India, 13.9%; Hong Kong, 12.9% and Russia, 11.9%
- Claymore/BNY BRIC (EEB): Brazil, 52.8%; China, 18.3%; Hong Kong, 15%; India, 9.2% and Russia, 3.6%
- SPDR S&P BRIC 40 (BIK): China, 31.6%; Brazil, 23.9%; Russia, 23.2%; Hong Kong, 13.7% and India 6.2%
- First Trust ISE Chindia (FNI): China, 40.7%; India, 35.6%; Hong Kong, 13.6%
For full disclosure, some of Tom Lydon’s clients own shares of GXC and EEB.