India made a big announcement in time for the New Year, which excited many investors. Previously, it was very hard for individual investors to buy Indian stocks.
The Indian government announced that qualified investors would be able to buy Indian equities starting Jan. 15.
India is a very exciting country for many reasons. It has been one of the BRIC nations (Brazil, Russia, India and China), which consist of countries that Jim O’Neill, of Goldman Sachs, thought had strong growth characteristics.
India has the ninth-largest economy in the world. The country also has a growing population, and will likely have the world’s largest population within a few years. If India achieved a GDP per capita level close to Serbia, the total GDP of India would be as large as the USA's.
However, foreign investors need to be careful about investing in India for several reasons.
The BRIC countries are still prone to capital problems during economic crises. In 2011, China, India and Brazil were among the worst performing stock markets worldwide. Institutional investors quickly leave emerging markets when there are signs of panic and invest in safe-haven countries like the United States and Canada.
In addition, the currency also suffered. The Indian rupee fell close to 20 percent versus the dollar in 2011 despite the efforts of the federal government and the Federal Reserve to weaken the dollar and strengthen exports.
Investors who bought Indian stocks wouldn't only have lost 45 percent, but an additional 20 percent when converting back into dollars.
Many investors are rightfully worried about a deep recession in the eurozone — such an event would hurt the Indian market and rupee a lot more than the U.S. market and dollar.
There are other reasons to be cautious when investing in India. After speaking to some very astute investors in India, one theme which was revealed is the difficulty for outsiders to understand Indian companies.
India has close to 5,000 publicly traded companies. However, many are owned largely by insiders who don't have concern for outside investors.
Many companies have a large source of income from the government.
India has a lot of government corruption and people should be aware of companies that might fall out of favor with certain politicians.
Amitabh Singhi, a successful hedge fund manager and colleague of mine, believes that it is very hard for a foreign investor to get a good grasp of the country.
While opening up the Indian stock market to foreign investors is a positive sign of free enterprise advancing in Asia, investors should be very cautious before committing their capital.
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