(INFY) Investing in Emerging Markets: Three Reasons Why You Should Buy India, Not China

October 3rd, 2009

India has come a long way since 1997.

The year marked my first trip to the country – and I remember it well, as I headed back to America with a resounding “sell” ringing in my ears with regard to India’s investments.

At that time, the market was clearly manipulated by several large traders. One in particular was Hershad Metha, referred to as the “Big Bull.” And bull is exactly what he fed to the masses, as he borrowed money from the government-owned banks and plowed the cash into the stock market. Result? The mother of all (fake) bull markets, created by a man with a choice word missing from the end of his nickname!

Knowing this, and the precarious position of investing in emerging markets at the time, I issued a “don’t touch with a 10-foot pole” rating on Indian stocks (shorting wasn’t an option at the time). The market crashed, as did most Asian markets.

Since then, however, every time I’ve returned, the profitable investment ideas I’ve picked up have more than paid for each trip. Right now I’m bullish on the technology sector – and in one company, in particular…

The Best Way to Invest in a Volatile Stock

The last time I visited India a year or so ago, I led a group of investors on a research trip to find the most profitable private and public companies.

It was clear the market was overheated, but there was still opportunity. We visited several public companies, but tech giant Infosys (Nasdaq: INFY) jumped out as leader of the pack.

But liking a company is one thing. Investing your hard-earned money in it is another.

As we’ve advised many times in the Xcelerated Profits Report, the best way to invest in a volatile stock or market is to either do so in increments, or by using a strategy that mitigates risk while also providing a healthy upside.

Knowing that the market was ripe for a correction, we executed the covered call technique, where you sell call options against shares that you own in order to receive cash upfront, lower your original cost and reduce your downside.

Result? We ended up owning Infosys at around $30 per share (the stock currently trades around $48) – about 15 times earnings for a company growing its bottom line at twice that rate. And in January, our shares will be called away from us we’ll pocket a tidy gain.

So why India?

Three Reasons Why India Tops China’s Emerging Market

When you talk about emerging markets today, the “BRIC” nations immediately spring to mind – Brazil, Russia, India and China.

China tends to receive the most press within that quartet. But here’s why you should choose India instead…

~ Better Protected: India’s economy is much more sheltered from the global financial contagion because it’s smaller, less reliant on export growth of goods and the central bank is much more conservative in its monetary policy. Unlike China, India isn’t in the position where it must produce goods and keep the factories running in order to please the populace. Instead, it is focused on developing the country by internal consumption.

And a big part of that comes from…

~ A Fast-Growing Technology Market: India exports what China cannot – technology services. So instead of running factories at full tilt, it has offices that service the fastest-growing sectors of global economies. In addition, technology actually performs better in a recession than the production of hard goods, since people use technology to make operations more efficient.

~ An Authentic Market Rebound: And now for the meat of it when it comes to investing. While the Indian stock market has rebounded on a par with China’s over the past year, the rebound is absolute. That’s because it’s not stimulated in large part by government spending for make-work projects.

Don’t get me wrong… India does have its fair share of boondoggles, too. But in terms of safety for your emerging market dollars (as well as transparency), it’s ahead of the game.

And in addition to all this, India boasts a much freer currency, no language barrier, educational superiority and a long-standing democratic tradition.

So it is time to buy India now?

The Best Way to Invest in India’s Emerging Market

If you want exposure to India’s emerging market in your portfolio, stick with Infosys. But wait for a pullback to $35 before you buy. We’re expecting a pullback in both Indian and Chinese shares from a technical perspective.

But don’t just sit and wait. If you read my colleague Lee Lowell’s column from Tuesday, you’ll know there’s a way in which you can buy the stocks you want at the price you want… and get paid for it. You do it by selling put options.

For example, in this respect, you could sell for the INFY January 2010 $35 puts for $0.60 per contract. This means you’d receive $60 for each contract you sell ($0.60 multiplied by 100 shares in the contract = $60) – your money to keep, no matter what happens – and have the chance to buy INFY shares for $35 at options expiration.

(Note: This is just an example, not an actual recommendation.)

There’s no doubt that emerging markets will crash from time to time (hence why they’re called “emerging” markets – they’re raw and volatile). But in India, the landing will be softer and the recovery from the inevitable downturns will be as strong, if not stronger, than most emerging markets.

China, in particular, looks decidedly overheated at the moment, since its recovery hinges largely on what happens in the U.S. The best way to play China is by investing in its ETF – the iShares FTSE/Xinhua China 25 Index (NYSE: FXI), which tracks the price and yield performance of top Chinese shares. A good buy level would be under $30. And because the ETF has options available, you could again sell puts at the $30 level.

Good investing,

Karim Rahemtulla

View original at: Investment U