The Indian market zoomed 17% on Monday on the news that the Congress Party had been re-elected with an increased majority. It’s certainly true that some of the other alternatives – for example a weak leftist Third Force coalition including the spectacularly corrupt Mayawati Kumari (India’s richest politician, a keenly fought title) – would have been worse.

Nevertheless, you have to remember that the Congress Party (also known as the India National Congress, and referred to by its initials, INC) is responsible for most of India’s woes, both recently and in the 60 years since independence, and that putting it back into power is unlikely to bring much of a step forward – economically speaking.

Condemned to Slow Growth

For more than 40 years after independence – albeit with one short exception – India was ruled by the Congress party and condemned to slow economic growth. Then, after 1991, then finance minister Manmohan Singh began opening up the economy. However, growth had already slowed again in the mid 1990s and it was only under the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee in 1998-2004 that India removed many of its longstanding statist obstacles to growth, and began to enjoy economic growth rates comparable to those of China.

The Vajpayee government was rejected by the Indian electorate in 2004, in a stunning act of electoral ingratitude second only to Britain’s shocking 1945 rejection of Winston Churchill, who had helped engineer the Allied victory in World War II.

Since 2004, India’s Congress Party has been back in power under Singh – this time as prime minister – in a coalition with the left. The nation’s leadership has made endless promises of reform, but has really accomplished very little. Economic growth has continued to be rapid, largely because of the Vajpayee government’s reforms, which were particularly extensive during that administration’s last two years in power in 2002-2004. The Congress Party’s main achievements were run-ups in both public spending and the fiscal deficit, the latter of which seems likely to run at a rate of about 12% of gross domestic product (GDP) for the 2009-2010 period – if state deficits are included.

By the 2009 election, Vajpayee had retired, and his successor as BJP leader – L.K. Advani – was both old and associated with the party’s Hindu nationalist wing, so it’s not surprising that the BJP failed to make progress. The collapse of support in the election for the mostly leftist third parties is itself a good sign, making a swing back to the BJP under new leadership more likely whenever the next election occurs, probably in 2014.

In the five intervening years until that happens, India will have to endure a Congress Party government, either under current Prime Minister Singh, or possibly under newcomer Rahul Gandhi – grandson of former Prime Minister Indira Gandhi, which would make him the latest member of the Nehru/Gandhi dynasty to hold that office.

Don’t Expect Reforms

Congress’ claim to reformism becomes especially thin when you look at the party’s allies. For example, West Bengal’s Trinamool Congress led the violent opposition to Tata Motors Ltd.’s (NYSE ADR: TTM) “Nano” automobile plant in that state. Tata had managed to do a deal with Bengal’s Communist state government to produce the revolutionary $2,000 car, but the Trinamool Congress was able to force Tata to relocate the plant to Gujarat at a cost of more than $500 million, delaying the full production of the Nano by more than a year. In the recent elections, Trinamool, in alliance with the national Congress Party, was rewarded with 26 of West Bengal’s 42 parliamentary seats, and its leadership will doubtless be part of the new government.

The new government’s policy is thus unlikely to be very reformist, especially as it rejoices in the support of the egregious Mayawati. In welcoming the election win, Prime Minister Singh indicated further areas where India’s public spending and transfer payments needed to be increased, with no suggestion that privatization or reining back the immense public-sector deficit were a priority. It’s thus likely that the Indian government will continue as an ever-increasing drag on the economy, with a funding crisis possible if public spending increases too much.

In such an environment, it is unlikely that India’s 8% average growth rate of the last five years can continue; the average of the next five years is much more likely to be in the 4% to 5% range, possibly with an acute foreign exchange crisis at some point. There’s no question that India’s stock market – trading at a Price/Earnings (P/E) ratio of roughly 20 – is expecting much better than this. That means it’s time to step back.

When – and How – to Make Your Play

Once the euphoria has dissipated, and the Indian market has dropped at least 30% from its current level, to below 10,000 on the Bombay Stock Exchange’s Sensex Index, Indian shares will once again be worth looking at, if only because of the country’s immense long-term-growth potential – an upside great enough to overcome even the immense drag of most of its governmental shortcomings.

At that point, the heavy capital investors such as Tata Motors should be avoided, because of the unpredictability of capital availability in a capital market whose savings can be sucked into the government’s immense maw. Look instead at such non-capital-intensive exporters (the exchange rate is likely to remain relatively weak) as the software company Infosys Technologies Ltd. (Nasdaq ADR: INFY), or global pharmaceuticals producer Dr. Reddy’s Laboratories Ltd. (NYSE ADR: RDY).

Both stocks are currently somewhat expensive, with Infosys trading at about 18 times the consensus analyst estimate for forward earnings, and Dr. Reddy’s roughly 14 times. But both stocks should be purchased for long-term growth during periods when investor enthusiasm for the Indian market has had a chance to cool down.

Source:  With India, Long-Term Profit Potential Trumps Near-Term Concerns

The industry has enabled socio-economic development, enhanced economic growth and productivity, reduced poverty, and improved standards of living across the board. It’s even helped develop nuclear power in India.

And the company standing at the top of India’s IT mountain is not Infosys Technologies Ltd (INFY) or Tata Consultancy Services. And it’s certainly not Satyam Computer Services (ADR: SAY).

It’s Armonk, N.Y.-based International Business Machines Corp. (IBM).

“They’ve beaten their competition relatively handily,” Kaufman Bros.’s Karl Keirstead told Bloomberg, who pointed to IBM’s brand name and experience as draws for potential clients. “There’s a cachet in using IBM.”

IBM’s model is the anti-model. Whichever country the company is working in, it has a game plan exclusively catered to it. It encompasses not only the determination of the customer needs, but also the provision of every aspect of the required technology solutions – including recurring maintenance, updating and even financing.

And financing is crucial these days. IBM’s long history in the world’s markets has given the company a recognition and credibility abroad, helping to mitigate competitive threats from unproven newcomers.

Its presence in India will yield dividends as India’s economy emerges from the global financial crisis.

IBM leaders have shrewdly increased the company’s investments in the fastest growth areas of the world, increasing its unparalleled geographic diversification as it keeps emphasizing its higher-value businesses – especially software, highly profitable middleware and services.

At the beginning of 2009, 71% of IBM’s nearly 400,000 employees are working overseas – a 65% increase from two years prior.

In fact, IBM incorporates the words “global” or “world” in nearly every sentence of the business strategy outlined in its annual earnings report of 2008.

“The Internet has enabled communication and collaboration across the world and brought with it a new computing model premised on continuous global connection. In that landscape, companies can distribute work and technology anywhere in the world,” the report said.

It continues: “At the same time, the current economic crisis increases the pressure on both businesses and governments around the world to adapt…. Given these opportunities and economic challenges, IBM is working with its clients to develop new business designs and technical architectures that allow their businesses the flexibility required to compete in this new landscape.”

IBM Boosts Profits with Business Overhaul

In addition to global diversification, IBM has also successfully employed a versatile and aggressive business model. Between 2000 and 2008, IBM acquired more than 100 companies and poured more than $50 billion into research and development.

In 2000, the distribution of IBM’s business model was: Hardware (24%), software (25%), financing (10%) and services (40%).

But by the end of last year, the model had evolved to: Hardware (9%), software (40%), financing (9%) and services (42%).

The result was a 130% increase in annual earnings per share (EPS) on more than 22% annual revenue growth in that span.

For 2008 – by far one of the worst years for companies around the world – IBM posted an 18.4% increase in net income and 23.9% increase in earnings per share.

And IBM blew away analysts’ estimates with a fourth-quarter net income of  $4.4 billion, or $3.38 a share – a 12% increase from 2007. Analysts had expected IBM to earn only $3.03 per share.

What’s more is that the first quarter of 2009 is shaping up to be much better.

IBM said it expects a $9.20 EPS in fiscal 2009, up from the $8.93 it posted in 2008. It’s also forecasting an EPS in the range of $10 and $11 in 2010.

But more than anything else right now, investors want to first see the company’s first-quarter results, due Monday.

IBM’s Eventful First Quarter

IBM’s biggest news came in March, when the company made a $6.5 billion, or about $10 per share, bid for Sun Mircosystems Inc. (JAVA). IBM subsequently lowered its offer to $9 per share and talks fell apart.

According to a recent report by CNBC, Sun has attempted to restart negotiations, but IBM is wary of the government scrutiny that may result. A combined IBM-Sun business would dominate the server market with a near 50% share – something that could set anti-trust alarm bells ringing.

However, if IBM did move ahead with the Sun acquisition, the company would not only build on its hardware business and take control in the server market, it would further expand its software portfolio, which is the company’s most profitable business.

Regardless of whether or not it reaches a deal with Sun IBM has plenty of business to build on.

Big Blue is teaming up with tech giants to build 28-nanometer (nm) chips, a little more than a generation ahead of 45nm technologies used by industry leaders Intel Corp. (INTC) and Advanced Micro Devices (AMD), CNET reported.

It also recently inked a seven-year, $372 million deal to manage IT infrastructure of Canada’s National Financial Group (NA). That came three days after IBM announced a similar deal with of one India’s largest banks, Kurmanchal Nagar Sahakari Bank, which is planning to double the number of its branches in the next two years.

Finally, last week, IBM won an eight-year, $873 million contract with the state of Georgia to provide mainframes, servers, printers, service desk, end-user computing and disaster recovery.

Elliott Gue, editor of Personal Finance newsletter, wrote that IBM’s IT services are a steady revenue stream, and are a product of its long-established relationships with the world’s biggest companies.

And now – with spending tightening around the world – is the time they especially turn to IBM.

“Many of IBM’s key software and service offerings are designed to cut costs for companies and improve the efficiency of their IT infrastructure,” Gue wrote. “And during downturns, companies are always looking for ways to cut costs.”

Analysts polled by Thomson Reuters forecast first-quarter earnings of $1.65 a share on revenue of $22.6 billion. IBM earned $1.65 a share on revenue of $24.5 billion a year earlier.

Source: Hot Stocks: IBM’s Diverse Business and Global Presence Should Boost First Quarter Earnings

Question is: Will the oft-dithering Congress actually take some action to enact this proposal? You can bet that the hallowed halls of the Capitol are buzzing with debate and counter-debate at the moment, but trying to get blustering lawmakers to agree on something requires the patience of a saint.

Meanwhile, Federal Reserve Chairman Ben Bernanke is 3,000 miles away, where he made a speech at the London School of Economics today. I was struck by this tasty soundbyte:

“It is unacceptable that large firms, which government is now compelled to support in order to preserve financial stability were among the greatest risk-takers during the boom period… The existence of too-big-to-fail firms violates the presumption of a level playing field among financial institutions.”

Unacceptable, yes. But apparently not unacceptable enough to bail them out anyway – and then going on record to advocate more of the same. I wonder if his helicopter ever runs out of fuel.

Specifically, Bernanke stated that, “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.” And in Fed-speak, that also means leaving the door open for more corporate bailouts for firms that don’t deserve it – but will get it anyway. In return, Bernanke says they must accept the additional regulation that will follow.

* * * * * * * * * *

Cash Grab

On Monday, almost-President Obama asked for the remaining $350 billion of the initial $700 billion bailout package to be released into the economy. And while Bernanke says Obama’s rescue package proposal should provide a “significant boost” to the economy, it might not be enough.

The most pressing need appears to be an effort to remove the “large quantity of troubled, hard-to-value assets” from banks’ balance sheets. That would involve setting up what Bernanke calls “bad banks” to hold the assets in exchange for cash and equity in the bank. Another move could be for the Treasury to simply buy the assets (using public money, of course).

But until this situation plays out further and we see what kind of effect all this stimulus has, we simply don’t know whether it will work. In addition, there’s a real concern about how the economy and market reacts once the government begins to return to “normal” economic and monetary policy and some have questioned whether the Fed has an exit plan.

Bernanke is right about one thing, though: “The world is too interconnected for nations to go it alone in their economic, financial and regulatory policies… International co-operation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.”

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Tech Is Dead? Not At This Firm…

Speaking of international affairs, it’s rare to find a company whose quarterly profits just jumped by 33%… but that’s the case for Indian tech giant Infosys (Nasdaq: INFY).

Thanks to signing a range of new contracts, the firm raked in 16.4 billion rupees ($343.4 million) during the fourth quarter.

And despite Infosys CFO V. Balakrishnan calling it a “one-off event,” Infosys still stands to reap some reward from the fallout of the accounting fraud at its chief rival, Satyam Computer (NYSE: SAY), which boasts General Electric (NYSE: GE) and IBM (NYSE: IBM) among its clients.

Infosys is likely to continue to see growth in 2009, thanks to the Satyam situation, plus the recent multi-year contract it signed with Astra-Zeneca (NYSE: AZN), and the devaluation of the Rupee, which makes it more competitive.

Infosys is a current holding in the Xcelerated Profits Report (XPR) portfolio – one faring well for us, thanks to our strategy of selling covered calls against our shares, in addition to picking up a dividend on the stock.

To find out how you can join the XPR team and discover which companies you should add to your portfolio, check out this report.

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Profit Slump In U.K. As Economy Experiences “Frightening Deterioration”

In Britain, however, many firms aren’t faring as well as Infosys.

Accountants Ernst & Young said the number of publicly traded companies that issued profit warnings jumped by 17% in 2008 – a seven-year high.

And with the British Chambers of Commerce stating today that there’s a “frightening deterioration” in the U.K. economy (one report just out stated that the British GDP growth slumped by 1.5% during the fourth quarter – the worst performance in 28 years), it doesn’t bode well for an improvement in 2009.

In Japan, the situation is even worse…

* * * * * * * * * *

Japan: “Closed For Business”

Research firm Tokyo Shoko said today that corporate bankruptcies shot up by 27.7% in December, compared with a year earlier.

In all, 1,362 companies filed for bankruptcy, as the fallout from the financial crisis clobbered Japan’s economy. And 33 publicly traded firms also went out of business in 2008 – the most in postwar history – as the nation saw bankruptcies rise by 11% for the year – the most since 1997.

The news isn’t surprising, given the steep drop in Japanese exports like cars, and the fact that the country slid into its first recession in seven years during the third quarter.

Source: Stimulus, Bailouts, Bernanke… And The Great U.S. Cash Grab

This from Money Morning:

In a surprise to many, India’s central bank has cut its base-lending rate four times since October, going from 9% to its current rate of 5.5%. After all, isn’t India’s economy growing nearly as fast as China’s? And isn’t that growth already being fueled by an unprecedented level of middle-class spending?

The answer to both questions is a resounding “yes.”

But there’s a pesky asterisk here – and that’s the global financial crisis, the cash drought that has sapped nearly every country directly through their banking systems, or indirectly through fluctuations in exchange rates and gyrations in revenue received from key trading partners.

And the Reserve Bank of India’s rate cut proved two things:

First, its new governor, Duvvuri Subbarao, is less afraid of inflation than he is a global slowdown.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai (JPM), told Bloomberg News. “One way to look at it is that the global problem has begun to affect us.”

For years, India doggedly raised rates to keep widespread inflation in check. It even went as far as subsidizing food and forcing the state-owned oil companies to sell gasoline to domestic consumers below cost.

And second, Subbarao believes India should taper its economic growth outlook for 2009.

This installment of “Outlook 2009,” report will chart India’s growth next year – its headwinds, tailwinds and possible factors that could turn the direction of either.

It will also reveal the two best ways investors can ride along with India’s economic growth, and take home profits from India’s bullet-proof industries – and in the process, perhaps even offset some of the losses they’ve incurred here in the U.S. market.

India’s Headwinds

India’s economy logged an annual growth rate of 7.6% for the quarter ended Sept. 30 – its slowest rate of growth in nearly four years.

India’s farm sector employs about 60% of India’s 1.14 billion people. That was great during last year’s run-up in commodity prices, but those prices have subsequently fallen, and so has the ag sector’s rate of growth – 2.7% in the quarter ended Sept. 30, which is well below the 4.7% pace of a year ago, according to The Wall Street Journal.

Manufacturing – also a powerful economic engine – has also stopped chugging as hard. That sector advanced 5.0% in the last year, a significant drop from the 9.2% growth from the same period the year before.

The global deceleration bears much of the blame for those drop-offs, as the United States far and away, remains India’s top trading partner.

But India is now dealing with a major share of homegrown problems – issues that have become ever more glaring as India’s economy grows in size.

The biggest problem of all: India’s domestic infrastructure is sorely deficient.

The country’s roads and highway systems are a mess, and its power grid is grossly insufficient for an economy of India’s size and rate of growth. That’s an observation that Money Morning guest columnist and well-known India-investment expert Karim Rahemtulla observed firsthand in India last year, when he lead an investor’s field trip around the country.

And while India has a prosperous and growing middle class, more than 200 million people living there are living in poverty. The government has taken many measures in the past decade to reduce poverty, but Rahemtulla says that the nation’s poor are “mostly against reform because they see little benefit from it.”

In a way, that, too, is an infrastructure issue. India’s poor don’t feel any kind of real connection to the country’s financial system. Indeed, many work day-by-day in the thousands of farming villages. A wave of government reform won’t affect them because they are living at such a far distance – physically, socially and culturally – from the parts of India that would benefit from any changes, new programs, or financial-stimulus efforts.

Even with those obstacles, the World Economic Forum (WEF) and Confederation of Indian Industry predict India will grow 7.4% to 7.8% in the 2008-2009 fiscal year.

But not everyone agrees with that assessment.

“Not going to happen,” Rahemtulla said. “There will be positive growth because India will reduce rates and devalue the rupee in order to stave off economic contraction which it can ill afford.”

But Rahemtulla was just as quick to credit the Reserve Bank of India for taking action as the global financial crisis spread across the world.

“They have explicitly stated they will aggressively promote fiscal and monetary stimulus to promote growth,” Rahemtulla said.

India’s Tailwinds

No question, the global financial crisis has crippled economic growth around the world. But the malaise – combined with the significantly reduced inflation that’s resulted from the downturn – has opened up a straightaway into which India can shift its cautionary policies, refuel its economic engine, and ultimately re-accelerate growth.

“Taking note of the downturn in the inflation rate, RBI has lowered the policy rate as well as the reserve requirements. RBI’s policy is now biased towards stimulating growth,” India’s former finance minister, Palaniappan Chidambaram, said in reference to the steps taken by the Reserve Bank of India.

“If the rate of inflation continues to decline, the policy rates may also moderate and the bias in favor of growth may deepen,” he told economic editors during a meeting late last year, Reuters reported.

India’s annual inflation fell near a 10-year low of 6.38% in December, a dramatic drop from the 13% growth rate in August. The trend is expected to continue, with inflation slowing to 5% or less by March, Pronab Sen, secretary at the ministry of statistics and program implementation, told Reuters.

That could open a door for the Reserve Bank of India to cut interest rates further, encouraging banks to lend money. And though lower rates may weaken the rupee, Rahemtulla says that will make India’s exports more appealing – especially as countries around the world tighten their belts amid the global financial crisis.

Low inflation isn’t the only tailwind that’ll rebound India’s economy back to its high speed.

India’s overall economy sputtered, but a pair of critical sectors posted promising numbers: Construction is up 9.7% from a year earlier, while India’s service sector has advanced at a robust 10.8% in that same span.

Credit goes to India’s middle class, which, like China’s, is growing in both numbers and overall strength.

Also very promising: Only $1 billion of the Reserve Bank of India’s $510 billion loan portfolio is in toxic Western assets.

That explains why – at a time when the global turmoil has claimed several major U.S. banks – none of India’s banks have gone bust.

India is unmistakably frugal. And its monetary policy proves that it is willing to accept a reputation for being a stifler of growth – instead of being known as being clumsy, overzealous and even reckless, as many U.S. banks are now accused of being.

Two Ways to Play India… for Cheap

Like every major economy, India is falling short of previous economic forecasts in large part because of the global financial crisis.

But make no mistake: Next to China, India’s economy will grow four-to-five times faster than most of the world’s other major economies – many of which are stuck in recession.

For now, investors should target the companies in India that are internationally competitive and are active exporters. That’s because any budget or inflationary difficulties will probably be reflected in a weakening of the rupee, which will help countries exporting from India.

Infosys Technologies Ltd. (ADR:INFY) is India’s premier exporter of software. The company carries almost no debt, and its shares are trading at a current Price/Earnings (P/E) ratio of 12.6, with a dividend yield of 1.48%. That P/E is quite low for a company in a high-growth market such as software.

Dr. Reddy’s Laboratories Ltd. (ADR:RDY) is India’s premier manufacturer of generic pharmaceuticals, and is positioned to benefit in the 2008-2012 period as many popular drugs lose their patent protection and are opened to international competition. In the near term, too, as household and corporate budgets tighten around the world, people will more likely opt for generic prescription drugs, instead of high-price name brands.

Dr. Reddy’s has moderate debt (about 50% of equity), and is trading at 19 times forward earnings – not at all pricey, given the high promise of the generic-drug sector. The stock also features a modest dividend yield of right around 1.0%.

Both stocks are down nearly 50% from their 52-week highs, suggesting value.

This is the eleventh installment of Money Morning’s”Outlook 2009” series, which looks at the global investing outlook for the New Year.

Source: India’s Economy Standing Firm Amid the Growing Global Financial Crisis

The Reserve Bank of India cut its overnight lending rate from 9% to 8%, according to a government statement issued in Mumbai yesterday. The “surprise move” that came days before a regularly scheduled meeting of its policy board came after India’s central bank reduced the cash reserve ratio by 2.5 percentage points to 6.5% – retroactive to Oct. 11, Bloomberg News and MarketWatch.com both reported.

The so-called “repurchase rate” is the discount rate at which India’s central bank lends money to commercial banks to infuse liquidity into the market. India’s rupee weakened while bonds reversed losses after the central bank’s announcement. The Bombay Stock Exchange rose 2.5% for the day – closing at 10,223.09 – although it jumped as high as 5.6%, BBC News reported. On Friday, India’s key stock index fell to its lowest close since June 2006.

“By lowering rates, thereby liquefying the system and offering stimulus to deflect slowing growth, India may be ahead of the curve for the first time in making the correct monetary policy decisions to prevent a recession which it cannot afford,” said Rahemtulla, a frequent Money Morning contributor who serves as the editor of such financial publications as The Smart Profits Report and the Xcelerated Profits Report.

In late May 2007, the Bombay exchange became the third emerging stock market after China and Russia to surpass $1 trillion in market value – a surge that was helped at the time by the nation’s fastest economic growth in six decades, a flood of foreign investment and a strengthening rupee, Bloomberg reported at the time. On the day it achieved that milestone, the 30-stock Sensitive Index, or Sensex, closed at 14,508.21 – 1% below its then-record high.

“India has been one of the [world’s] largest recipients of foreign direct investment, which accounted for the boom in the stock market over the past five years,” Rahemtulla said.

Clear Fears

India today clearly fears that the ongoing turmoil in the worldwide credit markets remains a threat to drop much of the global economy into a planet-wide recession. China’s economic growth slumped to a five-year low last quarter and Vietnam reduced borrowing costs yesterday, as JPMorgan Chase & Co. (JPM) and UBS AG (UBS) said the world economy is sliding into its first recession since 2001.

“A 100-basis-point cut is an indirect admission that not all is ‘hunky dory’ with the India growth story,” Nandkumar Surti, chief financial officer at JPMorgan Asset Management India Pvt. Bank in Mumbai, told Bloomberg. “One way to look at it is that the global problem has begun to affect us.”

Fluctuations in India’s bond yields this month were the widest in more than five years as the central bank took steps to ease a liquidity crunch. India Reserve Bank Governor Duvvuri Subbarao will review his monetary policy on Friday. Ironically, just one day after the central bank cut rates for the first time in four years, an employee strike at the Reserve Bank of India that started yesterday shut down bond trading in Mumbai, meaning traders at primary dealers and banks were unable to bet on additional interest-rate reductions, according to a Bloomberg report.

About 25,000 employees of the central bank walked off their jobs to demand higher pensions. Subbarao ordered the surprise rate cut to shield India from the global financial crisis that was touched off by the collapse of the U.S. housing market.

The near-collapse of the banking systems in both the United States and Europe this month prompted the International Monetary Fund (IMF) to throttle its worldwide growth forecast for 2009 from an earlier estimate of 3.9% all the way back to 3.0% — a point the IMF itself has labeled as the dividing line between global expansion and a global recession.

After growing at an estimated rate of 9.3% in 2007, the IMF says the growth rate of the Indian economy may slow to 7.9% this year and all the way down to 6.9% next year.

Subbarao, India’s 22nd central bank governor – and who took office just last month – is scheduled to release his first quarterly monetary policy statement on Friday. He can likely afford to reverse four years of tighter credit as declining commodities prices ease inflationary pressures.

India’s key wholesale price inflation number slowed more than economists expected to 11.44% in the week through to Oct. 4 – a four-month low. Crude oil prices have been cut in half since their peak in July – a reality that’s actually forcing the Organization of the Petroleum Exporting Countries (OPEC) to hold an emergency meeting on Friday, Money Morning reported yesterday. U.S. oil prices, which hit a record of $147.27 a barrel in July, have since plunged by more than 50%, actually hitting a 16-month low of $68.57 last week. The Reuters/Jefferies CRB Index of 19 commodities dropped to its lowest in four years on Oct. 17.

“We expect a further reduction in wholesale price inflation in the next two months,” Prime Minister Manmohan Singh told lawmakers in parliament yesterday. “Nevertheless, we must be prepared for a temporary slowdown in the Indian economy. Increased public expenditure is an important part of the solution.”

Singh had been under mounting pressure to speak publicly about the issues facing India’s financial markets. And with good reason: India’s stock market has lost more than half its value this year, the rupee has fallen to new lows and cash flow problems have crippled banks – leading to jitters among investors, The BBC reported.

India’s commerce minister, Kamal Nath, said he was confident India could remain a strong force on the economic stage and told The BBC that the country’s growth rate was “not as yet” being threatened: Unlike its U.S. counterpart, none of India’s banks have gone bust due to the Asian country’s “stricter norms,” Nath told Britain’s well-known global broadcaster

Also key: Foreign-direct investment remains strong, and export growth soared 31% in September.

That export growth could pose a problem, said Rahemtulla, the newsletter editor.

“India’s economy, while insulated somewhat from the global crisis because of its minimal reliance on outside trade, may still suffer from the current malaise because of its growing export sector,” Rahemtulla said. “The rate cuts, which will likely be followed by more cuts, are being made to ensure India’s competitiveness by allowing rupee depreciation, which helps its strong outsourcing and tech sectors.”

That, in turn, will directly benefit such companies as Infosys Technologies Ltd. (ADR: INFY). Wipro Ltd. (ADR: WIT), Tata Motors Ltd. (ADR: TTM) and global IT-services provider Satyam Computer (ADR: SAY), Rahemtulla said.

Tata Motors recently gained global fame when it introduced a fully functional $2,500 car called the “Nano” for the India market.

Finance Minister Palaniappan Chidambaram asked India’s parliament for approval to spend an additional $49 billion (2.4 trillion rupees) on rural jobs, food and oil subsidies in the year ending March 31 to boost the economy, which has advanced at a record 8.8% annual clip since 2004, according to Bloomberg.

India’s leadership “must have been worried about global growth, big economies and [the fact that other key economies in] the region [are] slowing,” Sailesh Jha, senior regional economist at Barclays Capital (ADR: BCS) in Singapore, told Bloomberg yesterday, referring to gross domestic product (GDP) report for China.

Hit “The BRICs” for Superior Profits?

Although central banks in the United States and Europe have pared interest rates in an attempt to avoid a worldwide recession, only India and China among the so-called “BRIC” economies of Brazil, Russia, India and China have joined global policymakers in that battle. Russia lowered its reserve requirement for the second time in a month, while Brazil reduced the measure Oct. 13 for the fourth time in three weeks.

Back on Oct. 8, easing inflationary pressures in China enabled that nation’s central bank to pare interest rates for the second time in three weeks. It reduced the one-year lending rate from 7.2% to 6.93% on the same day that the U.S. Federal Reserve, European Central Bank (ECB) and three others lowered rates in an unprecedented coordinated worldwide action. China also reduced the proportion of deposits that lenders must set aside as reserves by 0.5 percentage points.

China’s economy, the biggest contributor to global growth, zoomed along at a 9% clip in the third quarter, that country’s statistics bureau announced yesterday.

In a report released last week, the Macquarie Research unit of Macquarie Group Ltd. said that Indian real-estate developers are facing a shortage of funds, which may slow demand for steel, cement and transportation products and services.

“The capital crunch has hit the real estate sector very hard,” Macquarie analysts Unmesh Sharma and Bharat Rathi said. “We believe the tightness will continue for a few more months, given the difficulty in raising capital through bank debt, equity markets and (more recently) private equity.”

The decline in demand is already showing in India. The nation’s output at factories, utilities and mines rose 1.3% in August from a year earlier, after a revised 7.4% gain in July, as rising borrowing costs have dampened demand from consumers.

Rajeev Malik, a regional economist with the Macquarie Group in Singapore, recently said that the “downside risks to India’s growth have increased, while the upside risks to inflation have receded. We expect inflation to continue improving, thereby facilitating a shift in the RBI’s monetary stance.”

Source: With its Surprise Interest-Rate Cut, India Puts Itself “Ahead of the Curve,” India Expert Rahemtulla Says

No doubt, both countries’ markets are suffering this year, with China’s Shanghai A Index down 50%, and India’s Sensex Index down 25%. It’s no secret that India is struggling with both a growing budget deficit and mounting inflationary pressure. But China has problems too – it’s just hiding them under the carpet until the Olympics are over.

That’s why, for me at least, the investment decision is clear – I’ll buy the country whose problems are out in the open and already reflected in stock prices.

China’s Pending Credit Crunch

China’s inflation has been quiescent recently. It declined from 8.7% year-over-year in February, to 7.1% in June, taking it below the People’s Bank of China’s (PBC) one-year lending rate of 7.47%. Since the principal driver of global inflation has been the sharp run-up in energy and commodity prices, China’s inflation moderation is anomalous.

Apart from any figure-fudging in the run-up to the Olympics, China’s moderating inflation can be explained by increased state controls and subsidies. Rice and wheat prices have been controlled only since January, while energy subsidies have increased in 2008, from $22 billion to $40 billion, as the country holds petrol prices down to two thirds the U.S. level – around $2.85 per gallon in Beijing.

Those effects alone would suppress reported inflation by 3%-4%.

China has also used every effort to produce a quiescent population and clean air for the Olympics –1 million cars have been banned from Beijing streets for three months, for example. But once the Olympics are over, those Herculean efforts will no longer be necessary. We can then expect an easing of food price controls (which themselves require subsidies to bail out farmers) and a sharp reduction in energy subsidies. At that point, it seems inevitable that reported inflation will soar into double digits.

The PBC’s lending rate of 7.47% and deposit rate of 3.33% will then be highly inflationary. It will also provide substantial disincentives to saving. Since the Chinese authorities appear to understand the role of interest rates in controlling inflation, rates will no doubt be raised sharply, so that at least the lending rate will be in double digits, along with inflation.

A post-Olympic credit crunch will be the result, but it won’t affect the largest government-controlled companies. They will be bailed out if they run into difficulty. However, the crunch will be particularly damaging to small businesses, as well as the true private sector.

The Devil You Know vs. the Devil You Don’t

In India, on the other hand, wholesale inflation rose from 7% in March to almost 12% in July. The Reserve Bank of India is also running negative real interest rates; they are currently about 8% nominal.

As in China, the Indian government is subsidising food and forcing the state-owned oil companies to sell gasoline to domestic consumers below cost. The result has been an explosion in the Indian budget deficit, which is thought by many observers to exceed 10% of India’s gross domestic product (GDP) in the fiscal year to March 2009.

Both China and India are dealing with excessive inflation, interest rates that are too low, and budgets that are out of balance (though China’s figures are so opaque one cannot be sure of the true position). Falling oil prices could help the inflation position in both countries, but it is unlikely that oil prices will fall enough to restore stability in either.

The difference between the two countries is that China is still under the impression that its inflation is a moderate and controlled problem, whereas India has no such illusions.

For this reason, I would be more tempted by an Indian investment in the current market than by a Chinese one.

When investing in India, it is advisable to focus on companies that are internationally competitive and active exporters, rather than looking at the domestic market. That’s because any budget or inflationary difficulties will probably be reflected in a weakening of the rupee, which will help exporting companies. It is also preferable to look for companies with, at most, moderate leverage, which are less likely to suffer from a banking squeeze.

Infosys Technologies Ltd. (ADR: INFY) is India’s premier exporter of software, with almost no debt, that is currently trading at about 17 times earnings to March 2009, with a dividend yield of 1.9%. That high rating reflects the growth potential of Infosys’ business sector, in the context of which it is reasonable.

Dr. Reddy’s Laboratories Ltd. (ADR: RDY) is India’s premier manufacturer of generic pharmaceuticals, poised to benefit in the 2008 – 2012 period as many popular drugs lose their patent protection and are opened to international competition. It has moderate debt, about 50% of equity, and is also selling at a multiple of 17 times earnings to March 2009, with a dividend yield of only 0.8%. Again, the relatively high rating reflects the growth potential in Dr. Reddy’s global business.

Source: India’s Reliability Provides a Razor Thin Edge Over China

And we concur: The BRICs are four markets investors need to carefully consider as places to put some of their money.

That’s why we here at Money Morning developed “The BRIC Report,” a new feature in which we’ll periodically update you on the latest developments in each of the BRIC economies and stock markets, and highlight some BRIC-related companies you might want to look at.
In Part I of this report, we analyzed Brazil and Russia. Here in Part II, we examine India and China.

India Intrigue

Given that its stock market is down 23% this year, you’re probably surprised to hear that India is my favorite of the BRIC economies. Even worse: India’s torrid economic growth is throttling back a bit, and there are signs of a credit crunch.

But investors need to hear the proverbial “rest of the story.” You see: If India had no problems, its stock market would be trading at 40 times earnings – and not 18 times earnings, as it is now. In other words, India could well represent a “double” for investors with the courage to buy in now and stay the course.

Without a doubt India remains one of the world’s great long-term growth plays, and investors today are likely getting in on the ground floor of a major long-term bull market.

India’s economic growth was 9% in 2007, and will be around 8% in 2008, so the overall market seems reasonably valued at the current multiple of 18. If India can get its political and economic houses in order, it has some very real prospects for a couple of generations of rapid growth before living standards start to approach the West and growth rates slow.

In the short-run, however, there are some potential pitfalls to be aware of. The current Indian government, in office since 2004, is a coalition between the Congress Party, which had ruled India for most of the period since independence without any great success, and the anti-market Communists. Although Prime Minister Manmohan Singh is a moderate, the government has seen India’s economic emergence as an opportunity to fund favorite projects and social programs.

The budget for the current fiscal year (ending next March) proposes an 18% spending increase, and that’s after spending rose 24% last year. The state budget deficit (federal plus local) is around 7% of gross domestic product; in any kind of recession, that could easily spike to the 10% of GDP level at which deficits become difficult to finance.

There is hope on the horizon: An election is due in May 2009, at latest, and the center-right opposition is currently leading in the opinion polls. But wise investors know better than to base their investment plan on something as uncertain as that.

India’s other big problem is inflation, currently running at 8% per annum, which is higher than short-term interest rates. Higher commodity and energy prices have affected India as they have other countries; India’s position is made more difficult by the poverty of much of the population.

The Indian government has restricted exports of rice and has subsidized other foods and gasoline (the latter makes no sense socially since automobiles are largely owned by the middle classes).

Needless to say, these subsidies and restrictions make the budget deficit worse, and will pose an additional problem when they are lifted and newly unfettered consumer prices soar in response.

Growth has now acquired huge momentum, and any conceivable Indian government will do no more than slow it temporarily. Furthermore, the economics of the contracted-out customer support and manufacturing services that India has built into a national mainstay – in the era of globalization and the Internet – is so compelling that it will inevitably continue to produce huge profits for decades to come. The question is not:
“Should I invest in India?” It’s actually: “How can I afford to ignore India?”

And the answer is: You can’t.

Stocks to consider would include Infosys Technologies Ltd. (ADR: INFY), the Bangalore-based software giant, which seems pretty invulnerable to Indian or global recession and is selling at a fairly reasonable 19 times current earnings and 20 times next year’s earnings.

Another possibility is the pharmaceutical company Dr. Reddy’s Laboratories Ltd. (ADR: RDY), a major generic drugs manufacturer that can expect to benefit from the expiration of many U.S. pharmaceutical patents in the next five years, and carries a fairly reasonable forward P/E ratio of 23.

Finally, you might consider India carmaker Tata Motors Ltd. (ADR: TTM), whose shares currently trade at about 8.5 times earnings. In the luxury end of the market, Tata recently bought Jaguar and Land Rover from Ford Motor Co. (F). And at the bottom end, Tata has grabbed global headlines with its $2,500 Nano, a car that’s 40% cheaper than anything else on the world market.

Charged Up Over China

As we’ve pointed out repeatedly, China is a huge opportunity: It’s already the third-largest economy in the world after the United States and Japan, and it quite possibly could be the world’s largest by 2025. Its stated growth rate is even higher than India’s, although Chinese economic statistics are pretty suspect. Nevertheless, apart from the qualms raised by the Chinese market’s six-fold increase in 2006-07, and current high valuations, there are significant weaknesses that should not be ignored.

The two biggest: China’s banking system and its high rate of inflation.

China’s banks were for years used as a piggy bank for state-operated industries, many of them major money-losers and some that were technically bankrupt. Instead of the state recording budget deficits by subsidizing rubbish, the banks would lend the money to the bad companies, recording them as current loans. The result was a mountain of bad debt in the Chinese banking system. Back in May 2006, Ernst & Young estimated the bad debt had reached $911 billion (an estimate Ernst and Young was forced to withdraw; after all, they do have a substantial auditing business in that country!).

Encouragingly, Chinese authorities are beginning to attack this problem: An estimated $130 billion of the country’s $200 billion sovereign wealth fund has been used to recapitalize parts of the banking system. Since China has $1.68 trillion of foreign exchange reserves, and the bad debts are presumably still only $1 trillion or so, China does have the financial wherewithal to solve the problem. However, using FX reserves to recapitalize the banks would be highly inflationary, providing an almost 50% increase in the money supply.

That brings us to the next problem: Inflation, which is rising sharply. China’s official inflation rate for the year ending in May is 8.3%, but the actual inflation rate is believed to be much higher.

China’s yuan has been allowed to appreciate against the dollar to combat this, but the real need is for higher interest rates, which are still below the inflation rate. It seems inevitable that China will suffer some kind of tight money crisis, in which the banking system is recapitalized and inflation conquered, while the real economy suffers accordingly. However, such a crisis has appeared inevitable for several years now, and it hasn’t happened yet.

Whether or not China suffers a short-term crunch, its long-term prospects are excellent. Its stock market remains highly illiquid, since much of the market capitalization represents state controlled companies, of which only a small portion are publicly traded. Given the problems in the banking system, financial services should be avoided, while P/E ratios in many other sectors are far above what would be considered appropriate in the West. Nevertheless, with the 30% fall in the Chinese market since last November, there are now some bargains to be found.

• CNOOC Ltd. (ADR: CEO), China’s major international oil company, is selling at a P/E ratio of about 15. Most of its exploration activity is concentrated in China’s offshore region, but it also has operations in Australia, Indonesia and Africa. CNOOC is central to China’ search for oil resources, and critical to its future growth.
• Yanzhou Coal Mining Co. (ADR: YZC), China’s largest coal miner, is rapidly ramping up production to meet soaring worldwide demand for coal: China alone is commissioning one new coal-fired power station per week. Selling at 17 times current earnings but only 12 times forward earnings, Yanzhou is benefiting from soaring coal prices, as well as rocketing demand.

Both CNOOC and Yanzhou are major, state-controlled behemoths. For a venture into China’s true private sector, consider a look at a medium-sized company that is active in generic pharmaceuticals in what is potentially a huge market in China for such products. That company is Simcere Pharmaceutical Group (SCR). Its shares are currently trading at about 15 times current earnings.

[Editor’s Note: Part I of this “Special Report” ran both on Friday and yesterday.]

By Martin Hutchinson
Contributing Editor

Source: Special Report: Hit the BRICs for a Global-Investing Double Play

India is suffering high inflation, its growth is slowing and there are signs that a credit crunch is about to hit. But this can work to the advantage of investors. Without these problems, India’s stock market would be trading at 40 times earnings – and not 18 times earnings, as it is now.

Martin says that buy buying into India now, investors are likely getting in on the ground floor of a major long-term bull market. And he has selected three stocks most likely to benefit from the country’s growth potential…

India’s economic growth was 9% in 2007, and will be around 8% in 2008, so the overall market seems reasonably valued at the current multiple of 18. If India can get its political and economic houses in order, it has some very real prospects for a couple of generations of rapid growth before living standards start to approach the West and growth rates slow.

In the short-run, however, there are some potential pitfalls to be aware of. The current Indian government, in office since 2004, is a coalition between the Congress Party, which had ruled India for most of the period since independence without any great success, and the anti-market Communists. Although Prime Minister Manmohan Singh is a moderate, the government has seen India’s economic emergence as an opportunity to fund favorite projects and social programs.

The budget for the current fiscal year (ending next March) proposes an 18% spending increase, and that’s after spending rose 24% last year. The state budget deficit (federal plus local) is around 7% of gross domestic product; in any kind of recession, that could easily spike to the 10% of GDP level at which deficits become difficult to finance.

There is hope on the horizon: An election is due in May 2009, at latest, and the center-right opposition is currently leading in the opinion polls. But wise investors know better than to base their investment plan on something as uncertain as that.

India’s other big problem is inflation, currently running at 8% per annum, which is higher than short-term interest rates. Higher commodity and energy prices have affected India as they have other countries; India’s position is made more difficult by the poverty of much of the population.

The Indian government has restricted exports of rice and has subsidized other foods and gasoline (the latter makes no sense socially since automobiles are largely owned by the middle classes).

Needless to say, these subsidies and restrictions make the budget deficit worse, and will pose an additional problem when they are lifted and newly unfettered consumer prices soar in response.

Growth has now acquired huge momentum, and any conceivable Indian government will do no more than slow it temporarily. Furthermore, the economics of the contracted-out customer support and manufacturing services that India has built into a national mainstay – in the era of globalization and the Internet – is so compelling that it will inevitably continue to produce huge profits for decades to come. The question is not:
“Should I invest in India?”  It’s actually: “How can I afford to ignore India?”

And the answer is: You can’t.

Stocks to consider would include Infosys Technologies Ltd. (ADR:INFY), the Bangalore-based software giant, which seems pretty invulnerable to Indian or global recession and is selling at a fairly reasonable 19 times current earnings and 20 times next year’s earnings.

Another possibility is the pharmaceutical company Dr. Reddy’s Laboratories Ltd. (ADR:RDY), a major generic drugs manufacturer that can expect to benefit from the expiration of many U.S. pharmaceutical patents in the next five years, and carries a fairly reasonable forward P/E ratio of 23.

Finally, you might consider India carmaker Tata Motors Ltd. (ADR:TTM), whose shares currently trade at about 8.5 times earnings. In the luxury end of the market, Tata recently bought Jaguar and Land Rover from Ford Motor Co. (NYSE:F). And at the bottom end, Tata has grabbed global headlines with its $2,500 Nano, a car that’s 40% cheaper than anything else on the world market.