For the last of my five-part series on the best emerging market stocks (click here to read previous installments), I’m heading into the finance sector and also into one of the world’s awakening economic giants, India. It’s the best Indian stock you can buy on a U.S. exchange right now.
India has everything you could ask for in an emerging market. Its population is on the same scale as China’s (around 1.3 billion for each) and India’s population growth is faster than China’s. And while China has already realized huge growth from urbanization, infrastructure modernization and the mobile device revolution, that’s largely ahead for India.
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India’s big problem in economic development has always been the density of its bureaucracy and the fierceness of its politics. While China’s unitary leadership has been able to enforce its decisions from the top down, every major economic development decision India makes comes at the cost of years of political wrangling on the local, state and national level.
But recent news indicates that this may be changing, raising hopes that the 2014 election of Narendra Modi, a man with pro-business credentials and experience in economic development (plus, not incidentally, a majority in India’s national legislature) may finally be bearing fruit.
While China’s GDP growth has slowed from its decades-long string of over 10% per year to just 6.9% in 2015 and 6.7% in 2016, India’s economy grew by 7.6% in both years.
And in the longer run, India’s higher birth rate gives it a younger, faster-growing workforce to power its development, while China’s birth rate has not recovered from its decades of a state-enforced one-child policy.
There’s no denying that Chinese stocks are the uncontested big dogs of the emerging world right now, but India is poised to take its place as an economic leader. And that’s good news for emerging market investors.
My contrasting stocks today are Citigroup (C) and India’s HDFC Bank (HDB), both stocks that are doing well.
Like Citigroup (C)? Consider HDFC Bank (HDB)
Citigroup (C), like most financial stocks, is something of a turnaround story. C was torched in the Great Recession, and while the stock has recovered from its 2009 low at below 10 to near 70 in recent trading, it has a long way to go to regain its 2007 high at 500. Given its history, many investors can’t even stand to look at the stock.
But Citigroup has come a long way back, raising capital, passing government stress tests with ease and hiring world-class management and directors. While the company doubled its dividend after its June 29 earnings report, management has chosen to use a significant chunk of its free cash flow for stock buybacks, to which it has allocated $15.6 billion.
C fell from 61 to 35 during the market’s mini-bear phase in 2015 and 2016, but had recovered to around 50 when the U.S. election sent a burst of energy through all U.S. financial stocks. C took a pause in a range around 60 in late 2016 and through April 2017, but has now pushed out to near 70. It’s a strong stock of a good company that pays a 1.2% dividend and has good growth prospects as the global economy improves and U.S. interest rates continue to rise.
Here’s what the daily chart for C looks like since just after the start of 2017. Not bad, is it?
HDFC Bank (HDB), on the other hand, has a much smoother, much stronger chart. I’ll start with that, just so you can see the contrast.
HDB: The Best Indian Stock
Why is HDB so much stronger than C? The answer is in the annual growth rates of the U.S. economy (less than 2%) and that of India (over 7%). In addition, HDFC Bank’s revenue grew by 22% in fiscal 2016 and 14% in the 12-month period that ended in March. In the latest quarter, revenue grew by 20% and earnings climbed 23%. The numbers for Citigroup show three straight years of single-digit revenue declines and growth of just 6% in the June quarter with earnings growth of 2%.
It’s hard to make up for that kind of discrepancy in numbers, and Citigroup doesn’t. Analysts see Citigroup’s earnings growing by 10% this year and 14% next year, while their outlook for HDFC Bank is for 20% this year and 24% next year.
One of my favorite benchmarks for a stock I’m recommending in Cabot Global Stocks Explorer is the sheer scale of the opportunity each stock represents. And with India still in the early phases of the adoption of banking services—savings accounts, ATMs, credit cards, mortgages and auto loans—the Indian bank has a much bigger runway of growth ahead of it, making it the best Indian stock opportunity out there.
I’ve had HDB in the portfolio of Cabot Global Stocks Explorer since the middle of June, and the stock has already appreciated from 89 to 96. And banking stocks are quite tame compared to other opportunities I’ve found in the rapidly developing countries I follow. If you’d like to have the guidance of a veteran advisor to these markets, you can get started by clicking here.
Previously Recommended Best Emerging Markets Stocks to Buy Now:
To view the first stock recommended in the series, click here.
To view the second stock recommended in the series, click here.
To view the third stock recommended in the series, click here.
To view the fourth stock recommended in the series, click here.
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