The India Fund: Best Emerging Market GARP Play of 2012? (EEM, IFN)

Emerging market stocks rallied strongly this year in the first quarter. (You can get an easy snapshot by following the iShares MSCI Emerging Market Index (NYSEARCA:EEM). But with increasing evidence of an economic slowdown in the United States and Europe, they sold off hard in the second quarter.

That has created an attractive opportunity for global investors, especially those aware of intriguing developments in the world’s second-most-populous nation. Let me explain…

Asia, Latin America and Eastern Europe are primarily export markets. That makes them sensitive to economic softness in the developed world since these are end markets for many of their raw materials, natural resources and manufactured products.

At current levels, emerging markets represent compelling value. They’re home to the world’s fastest growing economies, but their stock markets also sport the world’s lowest valuations. For instance, the average stock in the United States currently sells for 12 times earnings. In Japan, it’s the same. In Europe, it’s 10 times earnings. But the average stock in the MSCI Emerging Markets Index sells for less than nine times earnings.

One of the most promising of these markets is India. Bear in mind, India has been growing at 7.4% a year for the last decade. And there are good reasons to believe this growth will remain strong, even if Europe and the United States start to fade.

Unlike China, India is an economy that thrives on domestic consumption. And that consumption will only rise in the years ahead. In fact, India is expected to overtake China as the world’s largest population by 2030. It also has one of the youngest populations among emerging market nations. Nearly half of its citizens are under 25.

Seventy percent of India’s population is rural. But better jobs and pay can be found in the nation’s urban areas. Economists estimate that the movement of labor from agriculture to manufacturing and services will add 1% to growth annually.

Plus, India is the world’s fifth-largest oil importer. With oil prices down more than 20% this year, this is likely to improve both Indian economic growth and profit margins.

The government in India, traditionally plagued by bureaucratic inefficiency, is taking positive steps, too. In May it cut in half long-term capital gains taxes on private equity investors while simultaneously postponing the implementation of new tax laws for at least two years. The Reserve Bank of India is poised to lower interest rates, as well.

This is one of the world’s great development stories, yet most Americans have little or no money invested here. Get invested, but skip the many opened-ended mutual funds that invest in this region and buy a good quality closed-end fund like The India Fund (NYSEARCA:IFN) instead.

Why? For starters, the fund is currently selling at a 13% discount to its net asset value, near the high end of its range. (For example, the fund sold at just a 2% discount only a few months ago.) And the fund’s expense ratio is a reasonable 1.3%. Open-end funds like the Dreyfus India Fund (DIIAX), Goldman Sachs India Equity (GIAAX) and Wasatch Emerging India (WAINX) have average annual expenses that exceed 2%.

In short, emerging markets are poised for dramatic growth. India, in particular. The India Fund gives you broad exposure to one of the cheapest and most-promising markets in the already-cheap emerging market universe.

Good Investing,

by Alexander Green, Investment U Chief Investment Strategist

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