Get a Room!
Chris Mayer recently took at trip to India – and got a good taste of what the ever-changing country is all about. Find out where Chris thinks there is opportunity for profit.
Our journey started in the bustling port city of Mumbai (Bombay), home to Asia’s oldest stock exchange. Then we moved on to visit high-tech campuses in Bangalore and Hyderabad. The latter is only miles from the ancient city of Golconda, once renowned for its diamonds. From there, we were off to green Kochi on the Malabar Coast, with its many coconut trees, rice paddies and slow-moving rivers. We wound up the trip in the north – traveling to Jaipur, in hot and dry Rajasthan, then to Agra to see the Taj Mahal and, finally, to the dusty capital city of Delhi.
In Delhi, I walked through the old market of Chandni Chowk, which I had read so much about. Once it was a destination for camel trains from Kashgar, traders carrying jasper and sardonyx, cinnamon logs from Madagascar and much more. Today, it’s still a busy market, lined with shops where you can buy just about anything.
I feel I got a good taste of what India’s all about – our itinerary was so packed it would take pages to tell you everything I saw and did. Of course, I also met with money managers and private equity firms operating in India. That’s how I learned some interesting – and surprising – things about investment opportunities in India.
For example, did you realize that India suffers from an acute shortage of hotels?
Our group stayed at wonderful hotels during our trip, such as the Rambagh Palace in Jaipur and the Oberoi Amarvilas in Agra. Still, the room rates were so out of whack with everything else. The supply-demand balance is so tight that the average room rates in some cities have reached the $400 level. Overall, room rates in India are higher than current average room rates for New York, London and Singapore. It was one of the most stunning economic facts of the trip. That $400 goes far in India, which is not true of the dollar in too many places of the world these days.
Hard to imagine paying that much for a hotel room in India, isn’t it? But it does make sense…the entire country of India has fewer hotel rooms than the city of Orlando!
This is why we had to book rooms nearly two years in advance to get the hotels we wanted. It’s not a situation that’s going to get a lot better anytime soon. The number of tourists visiting India will likely increase 10% per year through 2012, according to the World Travel & Tourism Council. That would make India one of the fastest-growing tourist destinations in the world, to say nothing about the business travelers. Some companies have gone ahead and put up their own hotels on land they already own. They run these hotels for employees and business visitors. They can’t afford to sit around and wait for government approvals to build new hotels.
So investment opportunity No. 1 would be to develop and run hotels in India. Unfortunately, there is no way for you as an investor in publicly traded stocks to do that. We heard a couple of developers talk about hotel and resort projects they have on tap. These were attractive, I thought, promising 30-40% annual rates of return on modest assumptions for hotel occupancy and room rates. They also have recent success stories, such as a 250% gain on a project started in January 2006. The people on the trip with me will have a shot at investing directly in these projects if they choose, but for purposes of this letter, it’s a tough insight to act on.
The real estate market is hot in India all around, and it’s attracting some mega money flows. Goldman Sachs calls India "the most exciting real estate market in Asia." Overseas funds have raised $2.4 billion through September to invest in Indian real estate. There’s another $1 billon ready to come on in the last quarter of the year. According to Private Equity Intelligence, investors will pour another $4-6 billion in 2008 into property funds with an Indian focus. All told, the market could grow from $15 billion to $90 billion by 2015. Kind of mind-boggling, isn’t it?
Even something like office space is in short supply. Commercial property space has doubled from 2002. Estimates call for another 150 million square feet over the next five years, and 500-650 million square feet over the next 10 years. That’s a lot of real estate.
In addition to real estate, there are many parts of India’s domestic economy that are attractive. Unlike China and the Southeast Asian economies, India’s economy is not so dependent on exports.
The explosive growth in India’s economy is mainly a grass-roots-driven trend. There are about 200 million participating consumers in India, with tens of millions added annually. Needs are everywhere – for power, water, basic infrastructure.
Unfortunately, yet again, many of these opportunities are off-limits to public equity investors. This was a common frustration as I traveled in India. It’s just not an easy place to invest. Foreigners cannot own Indian shares directly. Only institutional investors can. You can participate directly in certain projects, as I mentioned above, but that’s not helpful for our purposes here.
The easy way to invest in India is to buy the polite merchandise. That is, the ready-made off-the-shelf-goods on the NYSE – listed Indian companies such as Tata Motors or Sterlite Industries, or even an Indian mutual fund (the India Fund is a favorite). The problem is that the Indian stock market just went bananas while I was there. On Oct. 29, the Sensex – the common benchmark for the Indian stock market – topped 20,000 briefly. Over one 10-day stretch, the market rose 14%. For
perspective, the Sensex was only a little above 12,000 earlier in the year. Some sectors were even hotter. Between Sept. 18-Oct. 11, Bombay’s realty index soared 27%.
(This is not unusual among emerging markets lately. China’s stock market doubled already this year. Polish, Brazilian and Pakistani markets are all up over 40%. It’s remarkable how steep the climbs have been.)
I can’t put money into a market running that hot. Especially given India’s penchant (as with most emerging markets) for nasty corrections that lop off one-quarter or one-third of value in months. I’m inclined to wait. Certainly, it’s not in my best interest to go on expensive trips on my publisher’s dime and come back empty-handed as far as specific investment ideas go, but that’s where I am.
Therefore, while I remain bullish on India’s long-term prospects, I’m a bit fearful about the short term. I realize that the crack in the Sensex might not come, in which case, I’ll have missed out on a chance for good gains. But that’s OK. I always invest by first thinking about what I can lose. The gains will come. That approach works for me, and I’ll stick with that.
for The Daily Reckoning
December 12, 2007
P.S. So we, at Capital & Crisis, will pass on India for now, but I’m watching it carefully. Indirectly, of course, what’s happening in India affects the price of nearly everything in financial markets from the price of oil and sugar to the price of iron ore and grains. Plus, many of the companies in our portfolio are already working in India.
The Fed cut rates today. Or was it yesterday?
Visitors to this sunburned country are often confused. At least, this visitor is.
‘What time is it?’ he wants to know. ‘What day is it? What day is it in the rest of the world?’
He has a hard time getting his bearings. He can’t sleep at night, and can’t stay awake during the day. He looks for the North and finds the sun shining in his face. The trees are peculiar looking things that seem to be shedding…the cars are on the wrong side of the road…and the taxi-drivers want him to sit in the front seat.
It is particularly confusing because, otherwise, it seems so familiar. More about this below…
In the meantime, back to today’s big headlines:
"Fed Cuts, Stock Fall"
That is not a headline we read; it’s one we wrote – neatly summarizing yesterday’s market action. When we looked, stocks were down more than 290 points, measured by the Dow. This followed the Fed’s announcement of another quarter-point rate cute, bringing the key rate down to 4.25%.
Apparently, investors had hoped for an even bigger boost – a cut of 50 basis points. But the Bernanke Fed seems to have decided to play it safe – give Wall Street a cut, so they won’t complain…but don’t shoot the dollar in the head.
Otherwise, oil headed back up, to over $90…and U.S. Treasuries had their best day in years.
A rate cut was, of course, universally expected. Last month, housing prices fell 1.5%. Next month, they will probably fall even more. Falling house prices come as a shock to many homeowners. They thought buying a place to live was a sure thing; they thought they couldn’t go wrong…even those who didn’t go down the risky mortgage path are getting a rude awakening. Their house is worth less than they thought – and it’s happening more and more.
Alas, the financial marketplace is a lot less forgiving than it was a couple years ago. Now, marginal homeowners are being squeezed by higher prices and higher mortgage payments. And marginal investors – even those with billions to throw around – are being squeezed by falling asset prices.
The word ‘credit’ comes from the old Latin word – credere – which means ‘to believe.’ Investors – at the bottom and at the top – were nothing if not True Believers. They believed in the New Zoo Capitalism – in which everything is always under control…and the dangerous beasts are all behind bars. They thought the credit boom would never end…that house prices would always go up…that financial engineering could turn junk loans into triple AAA investible credits…and that the people running the zoo would always make sure the animals had enough to eat.
But now, it appears that the old capitalism – red in tooth and claw – is coming back.
And here’s an interesting comment…interesting because it sounds like something we might have written:
Ramachandra Bhagavatula, a managing director at New York hedge fund writes:
"What is happening is that household net worth is not growing by leaps and bounds – if anything it is going down – [which means] people actually have to start saving out of their current income. That has negative effects on spending growth. In many ways, I think the next five years in this economy could look like Japan after 1990. The big [growth] you got in variety of asset classes – financed by borrowing because of extraordinarily low rates – will come out. When you look at the economic landscape, stock prices are too high, house prices are too high, and you put all the pieces together and the size of the adjustment needed seems reasonably large. How many years does it take? Who knows? It doesn’t necessarily mean we have five years of recession – maybe just 3-4 quarters of recession."
*** "The Fed finished the year with those three rate cuts I called for back in May," says our currency counselor, Chuck Butler. "And just to refresh your memories, I’ve also said that the Fed will continue to cut rates in 2008, until rates get to 3-3.25%. That’s at least another 100 BPS, folks…think we’ll be getting foreigners to line up at the door for our 3% yielding assets? Ooooh…the thought of it is giving me goose bumps!
"Yesterday, I also said that the we might see the Fed change their wording of ‘balanced growth’. They didn’t go so far, but they did say, ‘Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks.’
"Hmmm…doesn’t sound as if growth is balanced with risk/inflation, does it? So why didn’t they just drop the bias? Because, they know that it could ‘spook’ foreign investors. And when foreign investors get spooked, they don’t buy our assets, and when they don’t buy our assets, the current account doesn’t get financed, and when the current account doesn’t get financed…the dollar gets weaker!"
For more from Chuck, see today’s issue of The Daily Pfennig.
*** Yesterday, we drove out to the Yarra Valley. Melbourne is usually ranked as one of the most livable cities in the world. We can see why. The houses are cute…many with double-decker porches and wrought iron trim. The place is clean…safe…and easy to get around.
Down in St. Kilda, it seems like a beach resort, with crowds filling the bars and restaurants, and young people gaily and drunkenly cavorting in the streets. In fact, our only reproach is that the city is relentlessly casual, like Florida or California.
Out at the Yarrawarra winery, it looks more like the Shenandoah Valley. The country is beautiful, open…with horses and vineyards…and friendly people serving up so many wine samples we had to lie down.
"This place is not that different from the United States and Britain," says our man on the scene, Dan Denning. "It’s really the same story. Lots of debt. High asset prices. People who’ve bought houses they really can’t afford, counting on price increases to save them. So far, they’ve done well…very well. Australia hasn’t had a recession in 16 years.
"All the Anglo-Saxon economies are similar – in that they all depend on consumer spending and have a lot of debt. But Australia – and Canada, too – have a great advantage. Especially Australia, because it’s so close to Asia. This is where the Chinese buy their raw materials. It’s a resource economy, not simply a consumer economy. Australians have gotten rich as prices of raw materials have gone up, especially out in Western Australia. And as long as the Chinese keep ordering resources, prices are probably going to keep going up…and the Australians are going to keep making money. But that’s the big question. If U.S. consumers stop buying, the Chinese aren’t going to need so many raw materials."
U.S. consumers buy one-fifth of everything the whole world sells. And U.S. consumers are feeling the effects of lower housing prices. As prices fall, the average person’s net worth goes down…and with it goes his desire to buy.
"But wait," said a man at our get-together the other night. "There are about 3 billion people in Asia. And right now, the Chinese government is encouraging domestic demand. They have plenty of potential demand in Asia. They just have to tap into it. Even if the U.S. stops buying, it shouldn’t hurt the Chinese economy for very long. They’ll still want houses and refrigerators…which means, they’re going to want to buy copper and iron ore from us here in Oz. I think we’ve got a long boom still ahead of us here."
Maybe so. But our guess is that the Australians may have a short bust in front of them too.
The Daily Reckoning