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Eastern promise seen with India's youth, emerging middle class

Consumer's spending power rising rapidly

When Bhim Asdhir returns to his birthplace of New Delhi, he's astounded at the changes that economic liberalization have brought.

Everywhere, he sees evidence of a burgeoning spending power as Indian consumers buy more cars, cellphones, scooters and medicine. People also eat out at restaurants more often, travel, and have more money in the bank.

"That process of the middle class emerging cannot be reversed. It takes on a momentum of its own."

As president and chief executive officer of Excel Funds Management Inc., he launched the Excel India fund in 1998 as a way for Canadian investors to gain exposure to one of the world's emerging powerhouses.

To see the potential, just look at cellphone use, Mr. Asdhir says. Six years ago, there were one million cellphones in India; today there are 50 million.

India's rapid progress is partly a result of its large, young work force that is well educated and fluent in English. That's one of the reasons that computer giant Dell Inc. has made India a hub for its software development and back-office work and multinational Dana Corp. has set up auto parts manufacturing facilities.

And while Mr. Asdhir believes that both China and India are good places to invest, 54 per cent of India's population is under the age of 25, making it even more youthful than China's, where the one-child policy will restrain growth.

"When you flash-forward 20 years, even China is going to rely on the young population of India."

To outsiders, India often seems daunting: The infrastructure is unreliable, bureaucracy is stifling and corruption is rampant. Mr. Asdhir acknowledges those pitfalls, but he says improvements are being made.

He Asdhir also sees good value in India's stocks. The 10-year historical average forward price-to-earnings ratio is 22 for India's Sensitive Index; today the forward PE is about 11.

Mr. Asdhir says that compression has happened because earnings growth has so quickly outstripped stock price growth.

The Excel India fund now has assets of about $65-million and a management expense ratio of 3.7 per cent.

Rohit Sehgal, chief investment strategist at Dynamic Mutual Funds Ltd., would like to see a specialized fund dedicated to India. The manager of the Dynamic Power Canadian Growth fund has about 8 per cent of the fund's assets in India.

His holdings include banks, mortgage companies, a privatized airline, a steel company and pharmaceutical makers.

Among Canadian companies, Niko Resources Ltd. offers significant exposure to India through its oil and gas properties there.

Pablo Salas of Trilogy Advisers LLC, manager of the CI Emerging Markets fund, says prospects are good in India because of the continuing deregulation and privatization in many industries. He has holdings in technology, banking, pharmaceuticals, wireless telecommunications, energy and cement.

He notes that the country now has about 65 companies with a market capitalization of over $1-billion.

"To get to $1-billion you have to be a real company. I think there's some depth in the market."

University of Toronto finance professor Eric Kirzner tried to buy his first India index fund in about 1980. The professor, who teaches at the Rotman School of Management, has been a proponent of investing in India for decades.

While the swelling economic growth provides the upside, the ride can be wild.

"It's about the most volatile market you're ever going to see."

The Morgan Stanley Capital International India index jumped about 13.5 per cent in 2004. That's a nice turnaround from 2003 when it plunged 69.7 per cent.

He notes that the track record of the Excel fund has picked up steam in the past couple of years, but he finds the management expense ratio fairly rich and is surprised that the asset base is not greater.

In addition to the Excel fund, Canadian investors can purchase two closed-end funds that trade on the New York Stock Exchange.

The India Fund Inc. (IFN) and Morgan Stanley India Investment Fund Inc. (IIF) have both had erratic performances, Prof. Kirzner says, and yet their average annual compounded return from January, 1998, to the end of April came in at 17.8 per cent in both cases.

The professor would most like to see an exchange-traded fund based on India's stock index that takes out the potential for a manager's bad calls. "If one debuted tomorrow I would be the first one to recommend it," he says.

Passage to India

To outsiders, investing in India can seem daunting, but Canadian investors can take part in the explosive growth of the country's burgeoning middle class through a handful of funds and a growing number of stocks.

Financials:

$27-TRILLION: Estimated size of Indian economy by 2050

7%: Expected growth for Indian economy this year

SOURCES: THOMSON DATSTREAM; GOLDMAN SACHS AND WWW.GLOBEFUND.COM

© 2007 The Globe and Mail. All rights reserved.

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