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India and the Road Ahead
By Mark Harrison, CFA
Categories: Alternative Investments, Behavioral Finance, Economics, Equity
Investments, Portfolio Management
With economic growth at a decade low of 5% and a bevy of lagging economic
indicators, India has had a rough year, and some analysts are predicting harder
times ahead. Is the era of India’s expansive economic growth over? Opinions on
the road ahead are divided.
Later this week, such luminaries as Avinash D. Persaud and Fereidun
Fesharaki will convene in Mumbai for this year’s India Investment Conference to
discuss the short- and long-term outlook. Speaking at last year’s conference,
Clint R. Laurent argued that, despite its many advantages, India’s huge
population will not automatically translate into any demographic dividend to
benefit investors. The underperforming educational system and the threat from
automation mean that India needs to work hard to leverage its low-cost labor
force in new ways, strategically positioning itself as a global provider of highquality goods to the affluent. In the coming decades, India is predicted to have a
fifth of the world’s working-age population. Despite this advantage, a weak labor
market and political impasse means the country may squander this demographic
advantage as it neglects to fully develop its middle class.
Particularly mystifying to outside investors is India’s thirst for gold imports which
is sufficient to regularly jolt global gold prices. Despite government intervention,
Indians continue to hoard gold on an epic scale rather than directing capital to
more useful purposes for example entrepreneurial investment, capitalizing their
banking system, or enlivening consumer spending multipliers. In an address to a
CFA Institute conference titled “The Truth about Gold: Why It Should (or Should
Not) Be Part of Your Asset Allocation Strategy,” Fuqua School of Business
Professor Campbell R. Harvey, suggests that most arguments for holding gold in
a portfolio are not supported by an analysis of the data. Nonetheless, an
argument can be made for including gold as a commodity in a well-diversified
portfolio, particularly if investors and central banks increase their demand —
even moderately — for gold. A series of remarkably popularEnterprising
Investor blog posts have explored the topic of gold in some depth over the past
year.
Academic research focused on India reflects the scarcity of reliable data on the
country, but recent research has evaluated the issues of BRIC-country ethics and
the impact of local versus international investors. In one study published in
the Journal of Business Ethics, the authors investigate the use of favors to
accomplish business goals by firm managers. They argue that the ethicality of
the favors should be not be viewed solely from a developed-country perspective
but rather by using the moral reasoning of the developing country in question.
The giver and the receiver of the favor, as well as network insiders and outsiders,
are defined as stakeholders by the study.
In another study by a pair of Australian researchers, the authors conclude
that local investors can affect how information is incorporated into stock prices in
their own country and that this “local investor information effect” differs in its
power by country. High levels of individualism by local investors are associated
with overconfidence, self-attribution biases, and a preference for risk, something
it could pay international investors to be wary of.
A CFA Institute book review of The Growth Map: Economic Opportunity in the
BRICs and Beyond, by British economist Jim O’Neill, notes the author’s
prediction that by 2050, the world’s largest economies will not be the G–7 nations
but will instead include several countries currently considered emerging markets.
India is tipped to grow out of the emerging market investing bucket, yet with such
strong prospects, why are emerging markets recently slumping so badly? For
India, the answer may well be its relatively weak economy which suffers twin
deficits, both current and external. According to a recent piece in
the Economist, prospects for a revival of India’s economy are unclear. It appears
that the measures being taken by India’s government are geared towards
keeping the economy afloat, but deep-rooted reforms will have to wait until after
the elections in 2014.
These recent CFA Digest summaries and related resources of interest to readers
are summarized below:
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India’s Opportunities in Tomorrow’s World: India’s rapidly growing
population will not automatically translate into a demographic dividend. The
country must address its underperforming educational system and the threat
of losing unskilled jobs to robotics. India can succeed by leveraging its lowcost labor force and strategically positioning itself as a global provider of
high-quality goods to affluent consumers.
The Truth about Gold: Why It Should (or Should Not) Be Part of Your
Asset Allocation Strategy: Most arguments for holding gold in a portfolio
are not supported by an analysis of the data. Nonetheless, an argument can
be made for including gold as a commodity in a well-diversified portfolio,
particularly if investors and central banks increase their demand — even
moderately — for gold.
Did the Gold Standard Work? Economics Before and After Fiat Money:
In many corners, gold was seen as the cure-all for the weakening dollar.
Mark Harrison, CFA, takes a step back from the heated debate to ask: How
is a classical gold standard supposed to work? How did it actually work out in
the past?
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Start Me Up: Prospects for a revival of India’s economy are unclear. It
appears that the measures being taken by India’s government are geared
toward keeping the economy afloat, but deep-rooted reforms will have to wait
until after the elections in 2014.
India, Education, and Economic Growth: The Indian government’s focus
on education reform and economic expansion not only may help the country
recognize its potential to become an economic power but also will facilitate
the CFA Institute mission in that market.
Leading from Behind: With such strong prospects, why are emerging
markets slumping so badly?
Book Review: The Growth Map: Economic Opportunity in the BRICs
and Beyond: The author summarizes past research on the BRICs and other
emerging markets and predicts that by 2050, the world’s largest economies
will not be the G–7 nations but will instead include several countries currently
considered emerging markets.
A Stakeholder Approach to the Ethicality of BRIC-Firm Managers’ Use
of Favors: The authors investigate the use of favors to accomplish business
goals by firm managers in Brazil, Russia, India, and China. They argue that
the ethicality of the favors should be determined by the moral reasoning in
these countries rather than by using a developed country perspective. The
giver and the receiver of the favor, as well as network insiders and outsiders,
are defined as stakeholders.
India: Summary of Current Shareowner Rights: Standards and practices
can differ dramatically throughout the world’s financial markets, and
shareowners must know their rights in the markets where they invest.
Shareowner Rights across the Markets is designed to provide shareowners a
clear understanding of their rights, current practices, recent developments,
and legal and regulatory frameworks in 28 jurisdictions around the world.
The Information Content of Stock Markets around the World: A Cultural
Explanation: The information content of stock markets seems to be higher
in countries with investors who are more individualistic and less likely to
avoid uncertainty. The authors explore whether these differences in
information content are the result of cross-country cultural differences.
If you aren’t able to attend this year’s India Investment Conference, tune in to
watch live broadcasts of Avinash D. Persaud’s presentation “The End of
Quantitative Easing, the Outlook for Emerging Markets and the Rupee” and
Fereidun Fesharaki’s presentation “A Changing Global Energy Landscape —
Implications for India.”