Friday, October 23, 2009

Investment Opportunities In Emerging Countries

The potholes, frequent power outages, and various non-connected dots within emerging markets are dismaying and off-putting at first glance to unaccustomed visitors from fully industrialized countries. However, a smart investor can look at that same scenario as a golden investment opportunity. See the following post from Daily Wealth for more on this.

Two weeks ago, I returned from my second visit to the financial capital of India, the city of Mumbai (formerly Bombay).

On the first go-round, I was mainly in tourist mode and visited several other cities, too. This time, I spent a week here just working, meeting businessmen, and talking with investors.

I got a different perspective simply living there on a day-to-day basis. I got a sense for more mundane things like the harrowing daily commute. I got a better feel for how the city works. Mumbai looks and feels chaotic and messy, but for millions, it gets the job done.

Some parts of Mumbai are tough to stomach, such as the widespread and seemingly hopeless poverty. While at a stoplight, little kids came up to our car window begging. One was carrying a little baby, barely clothed, dirty. It was sad to see.

One of the things about India that I always find striking is the contrasts. There is great poverty in this city, but also great wealth. Often, they are side by side. For instance, we visited the oldest gold market in the city. It's part of a larger market that also houses a temple to the goddess Mumbadevi, from whom some think the city got its name. This market was packed with people. Cars, including ours, rolled slowly down the narrow streets, honking their horns at indifferent pedestrians.

Old, dilapidated buildings lined the streets with shops selling everything from linens to pineapples. In the gold market, we saw several blocks of gold merchants selling gold in all its forms. We stopped to visit the largest market maker for gold in the city.

We entered a decrepit building with towering slums around it. We got in a creaky elevator little bigger than a phone booth, with an attendant who opens and shuts the door. The elevator looked about a hundred years old. We got to our floor and went down a filthy hallway so narrow that you had to turn your shoulders to get by other people in the hall. Finally, we got to this gold merchant's office.

When we got inside, we entered a modern looking office – clean, wooden floors; air conditioned; a wall-mounted TV playing the Indian version of CNBC. You'd never know the squalor and chaos that exists just outside the door.

When it comes to India, I also always think of the infrastructure opportunity here. Our other daily trips throughout the city brought home how rough the basic infrastructure is. The roads are often clogged with cars and people and the occasional cart drawn by man or beast. The effects of this poor infrastructure are wide and deep.

India, for instance, actually wastes more fruit and veggies than it consumes, according to The Economic Times, India's largest financial daily. India is the second largest producer of fruits and vegetables in the world, but 30%-40% never make it to their destination.

As the Times reports: "Gaps such as poor infrastructure, insufficient cold storage capacity, unavailability of cold storage in close proximity to farms and poor transportation infrastructure all are contributing factors."

There are also routine brownouts and blackouts throughout India, often lasting for seven hours or more, which lead to food spoilage. It may seem hard to believe, but after being here for a week, I believe it.

Somehow, so far, India has managed to overcome many of these obstacles. The economy is still growing more than 6% annually. We saw more evidence of this, too, when we spent some time going over a cross section of midcap and small-cap Indian stocks. Many are growing 30%-40% per year, and have done so for 15 or 20 years.

One of the people we met on this trip was Jayesh "Jimmy" Seth, who runs KC Securities, a large brokerage firm in Mumbai. We also met his son, Harsh, a 22-year-old Northwestern graduate who returned home to make it in Mumbai.

Over lunch one day, Jimmy told us the advice he gave Harsh: "When you are in America, take note of all the daily conveniences you enjoy. Write them all down. Then, when you come back to Mumbai, check that list again. Whatever's missing, start a business around that."

It's a good piece of advice, as India has lots of gaps to fill, such as those basics of infrastructure. I think it's a brilliant strategy for all emerging markets. Look for the gaps in these emerging markets. Find what they don't have but want or need. Invest in the companies that fill those gaps.

For U.S. investors, you can play this idea with shares of water, agriculture, and energy producers. The huge and growing countries of India and China simply don't have enough of these resources to grow. They must buy them.

For instance, my readers have made good money on Nalco Industries (NLC), one of the world leaders in water filtration equipment and services. We've also made great returns in Potash, the world's largest agricultural fertilizer company.

I'm also bullish on smaller, local India plays. More will become available to U.S. investors as India grows. These ideas – and the resource investments I just mentioned – are the road map to making a fortune in emerging markets.

This post has been republished from Daily Wealth.
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