The Next Great International Growth Market

Yesterday, my colleague Robert Rapier explained “Why Every Investor Should Own International Stocks.” I could not agree with him more. I’ve long been an advocate for owning shares of foreign companies, especially when the US stock market appears fully valued.

At the end of July, the trailing 12-month PE (price-to-earnings) ratio for the S&P 500 Index was approximately 26. That is more than 40% higher than what it was ten months ago, after Fed Chair Jerome Powell vowed to raise interest rates as high as necessary to quell inflation.

Since then, the S&P 500 has gained 27% to reach a new high since the Fed started raising interest rates in March 2022. It is now within striking distance of its all-time high, a remarkable feat given considerably higher borrowing costs for consumers.

Read This Story: For New Growth in 2023, Go Beyond America’s Shores

Don’t get me wrong, I’m all for a strong domestic stock market. I’ve made a living over the past forty years helping investors save for retirement. Over that span, the US stock market has generated tremendous wealth.

At the same time, the American economy cannot continue to grow without the assistance of our international trade partners. Population growth in the United States is roughly half what it was twenty years ago. Over the same span, median family net worth has fallen by a third after adjusting for inflation.

However, there are other places in the world where those trends are improving. Especially in Asia, which accounts for approximately 60% of the world population.

In Robert’s article, he listed seven highly rated global mutual funds as one way to gain exposure to international stocks. All those funds own stocks from countries all over the world, including one that I believe could be the next great international growth market.

iShares MSCI India ETF

There is a lot to like about India from an investment perspective. Its population of 1.4 billion is tied with China as the biggest in the world, comprising nearly 18% of all the people in the world.

In addition, its fertility rate of 2.0% is far above China’s 1.2 rate. Also, its median age of 28 is eleven years younger than China’s median age of 39.

That bodes well for the future. According to the Times of India, India’s middle-class population grew from 14% of its overall population in 2005 to 31% in 2021 and is projected to reach 63% over the next 25 years.

The key to a vibrant economy is an expanding middle class population. Those are the consumers buying cars, houses, and just about everything else you can think of. And right now, India is in the early stages of a consumption boom.

For that reason, I like the iShares MSCI India ETF (INDA) as a play an international play on global growth. In fact, I like it so much that I own it in my personal investment account.

The fund’s top holding is Reliance Industries (NSE: RELIANCE.NS), which owns a wide variety of consumer businesses. Since India’s middle-class population started swelling seven years ago, Reliance has quintupled in price.

Nevertheless, India’s stock market has lagged the United States. Over the past five years, INDA has returned 35% while the SPDR S&P 500 ETF Trust (SPY) has gained twice that amount.

Mobius Favorite

Currently, banks account for five of the fund’s ten largest holdings and comprise 27% of its total assets. That makes sense in the early stages of a consumer revolution when demand for loans is at fever pitch.

The fund’s second-largest sector holding is Information Technology at 13% of total assets, followed by Energy at 12%. In short, roughly half of the fund’s assets are invested in money, computers, and oil.

That’s a good mix for a nascent consumer economy. And I don’t expect it to change much until India’s middle class population crosses over the 50% mark. After that, the fund will probably shift its emphasis to Health Care, Consumer Discretionary, and Materials to reflect shifting consumer demand.

India’s potential has caught the eye of international investing pioneer Dr. Mark Mobius. Over his storied career, Mobius has been at the leading edge of economic growth outside of the United States.

Last month, Mobius named India as one of his top countries in an interview with CNBC. He also listed Taiwan and South Korea among his top three global equity markets.

However, Taiwan’s and South Korea’s populations are miniscule compared to India. Also, they are vulnerable to geopolitical risk due to their small size and bellicose neighbors.

In contrast, India is too big to fail. Its economy is critical to both the United States and China. Even Russia wants India to succeed, since 20% of India’s annual crude oil imports now come from Russia.

To be sure, India will go through cycles of economic expansion and contraction in the decades to come. But over time, its stock market should grow at a considerably faster rate than the rest of the world.

Editor’s Note: Maybe you’re more focused on income than growth. Looking for the highest quality dividend stocks? Turn to our colleague, Robert Rapier.

Robert Rapier is chief investment strategist of our premium advisory, Utility Forecaster. He’s the “income guru” on the Investing Daily team.

After painstaking research, Robert found a rare type of investment that has raised its payouts by double-digits every year for the past 16 years. If you’re tired of piddly payouts, Robert has the remedy. Click here for details.

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