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Mutual Funds

Indian Stocks: Just Warming Up

Booming consumption and entrepreneurial flair are driving the gains.

India is giving China a run for the money. Although the so-called elephant economy is neither as large nor expanding as fast as the Chinese dragon, India may be better positioned than its Asian neighbor to sustain rapid growth over the next few years. The reason lies in the basic makeup of their respective economies. Exports account for a whopping 40% of the Chinese economy. But India’s exports account for only half that much. That means India isn’t nearly as dependent on tapped-out Western consumers to buy the stuff it makes. By contrast, domestic consumption accounts for 57% of India’s gross domestic product, compared with 37% of China’s.

And India’s record as a capitalist democracy, albeit still short, hasn’t hurt its ability to foster good home-grown businesses. As Sharat Shroff, lead manager of Matthews India Fund (symbol MINDX), says, “India’s story stems from the entrepreneurial quality” of its individual companies and their leaders. Shroff focuses on midsize companies that are run by executives who possess this quality and that have, he says, a history of consistently superior returns on equity, a measure of profitability.

The fund’s top holding, HDFC Bank, embodies the attraction of Indian investments. “Only half of the population has access to basic banking services,” says Shroff, and even fewer Indians have access to mortgages and consumer loans. HDFC appears well positioned to continue to expand lending as India’s middle class grows.