India and the United States have inked a bunch of tech and defense deals during the first state visit to Washington by Indian Prime Minister Narendra Modi. Executives and major investors are jumping on board, with Tesla (TSLA) CEO Elon Musk saying the carmaker will enter India “as soon as humanly possible,” while emerging-markets veteran Mark Mobius said he sees a “real future” in the country.

Given the travails of the Chinese economy and the growing number of Chinese stocks that are off-limits to U.S. investors due to sanctions, I’ll occasionally get an email from subscribers asking what I think of India. Is it the next China?

It’s more like the next India. India was off-limits to U.S. investors, too, pretty much until this decade, but mainly due to the lack of good investment options. Since the turn of 2020, the Nifty 50 is up 52.5%, and that’s disregarding the trough-to-peak climb after Covid. From virus-driven bottom to top, the Nifty 50 tracking 50 of the best listings is up 131%.

So this is really the first time to shine for Indian equities. India does indeed benefit largely because of China’s problems. Of course, India has recently replaced China as the country with the most people in the world, as I outlined when the change came in April. Together, they account for 35.5% of the global population of 8.0 billion. For investors taking a view beyond U.S. borders, they’re hard to ignore, particularly when it comes to emerging-market exposure.

Mobius, a long-term China bull, said India would be the better place to park US$1 million right now. He stays invested in China, but said the numbers in India tell a better story. He aims to boost the India allocation for Mobius Capital Partners from 15% to as high as 25%.

India has a young population, and one that is still growing, in both cases unlike China. Indian economic growth is forecast for 5.9% this year and in 2024, which is right up there with the best in Asia (the much-smaller Philippines economy being the other posting similar numbers). While Indian growth keeps getting revised upward, China is being downgraded to 5.5% growth for 2023, falling to 4.2% in 2024, looking at Nomura’s numbers.

So Modi’s visit comes at the best time for a country benefiting from “friend-shoring” and the recent trend of seeking out investments into U.S. allies. It’s often repeated that India is the world’s largest democracy. The U.S.-India alliance forms two sides of the square that is “the Quad” of Asia Pacific democracies, with Japan and Australia on the other corners.

A ‘Flawed Democracy’

We are hot off U.S. President Joe Biden’s description — a correct one — of Chinese President Xi Jinping as a “dictator.” But it’s worth noting that Modi is hardly a champion of the ballot box. Modi, first elected in 2014 and then re-elected five years later, knows how to manipulate voting to get what he wants. But he has steadily eroded democratic freedoms and operates as an autocrat.

India is a “flawed democracy” in the eyes of the global Democracy Index, put together by the Economist Intelligence Unit. Its downgrading to that designation since 2020 is thanks to Modi’s nationalist politics. The Indian government is concerned enough to secretly designate a team of officials to try to address the problem, according to The Guardian.

Likewise, Washington, D.C.-based think tank Freedom House has downgraded India to a “partially free democracy,” while the V-Dem Institute in Sweden calls it an “electoral autocracy.” Chief among the concerns are Modi’s harsh treatment of minorities in India, particularly the Muslim population, as well as his quashing of freedom of speech (as well as all political rivals).

Indian officials have mocked the rankings in public, much as China and Hong Kong attempt to dismiss what they call “so-called” U.S. sanctions. But in New Delhi, minutes of one ministerial meeting show that Modi is worried about the Democracy Institute assessment in particular and wants to see it improve.

One of the key concerns is that such rankings may deter multinational companies from investing into India. That is quite correctly a worry. India now stands to gain precisely because it is a U.S. ally and democratic, while China under Xi slides steadily into its Marxist dictatorship.

Ukraine War Beneficiary

But India’s U.S. alliance only goes so far. India remains an ally of Russia, too, and is the chief buyer of Russian oil now that it’s off-limits to most Western nations. There’s a nifty interactive feature here from The New York Times looking at how India profits from the Ukraine war. India also refines Russian oil and sells it back to places that include Western Europe.

There is no doubt that India is also a primary beneficiary of China’s political woes. Most multinationals with an overreliance on production in China will look to India first as the “China + 1.” With a pro-business government, improving infrastructure and a raft of regulatory changes that make both nationwide business and investing into India easier, it’s easy to see why India’s economy and stock market are booming.

Indian equities are at all-time highs and produced the strongest performance in the second quarter among Asian emerging markets. Indian equities have attracted US$10 billion in inflows from overseas investors since March, and both the strong performance and inflows look set to continue.

“Conditions are in place for the outperformance to extend to the whole year,” writes Frank Benzimra, the head of Asia equity strategy at Société Générale.

The potential weakness of the Indian rupee is always going to be a concern. Consequently, U.S. investors should look to hedge exposure. As someone who has lived in Asia since 2001, I think of the U.S. dollar-rupee rate of being “around 50, maybe 55.” But that’s way out of date. It’s trading today at 82 rupees and change to US$1.

Central bank activity should be supportive of stocks. Inflation, so severe a concern earlier this year that the Reserve Bank of India had to repeatedly tell the Indian Congress what it was going to do about it, has fallen back into the 2% to 6% range that it considers acceptable.

The Indian central bank was the first to pause its rate-hiking cycle, as I noted was likely to be the case near the end of last year. It may then start cutting rates early in 2024. Again, that should be good for Indian stocks.

Going the ETF Route

One of the problems investing into India is the lack of strong equity prospects. There’s also a severe concern about corporate governance, as laid bare by the short-selling attack on Adani Enterprises, one of India’s largest conglomerates; that attack began in January. Those questions have not been resolved.

Given the difficulty picking individual stocks in such an environment, any U.S. investor looking to play the Indian market would do best to select an exchange traded fund. ETFs spread the single-company risk so any nasty revelations such as those at Adani are mitigated.

There are a few to pick from, the largest by a long way being the iShares MSCI India ETF (INDA) , which has US$4.9 billion under management, five times the size of next-largest Indian-focused ETF, WisdomTree India Earnings Fund (EPI) .

The iShares India 50 ETF (INDY) is the ETF to choose to narrow in on Nifty 50 exposure, focusing on blue chips. However, the iShares MSCI India Small-Cap ETF (SMIN) (up 10.1% year to date) and the Columbia India Consumer ETF (INCO) (up 14.1%) have been this year’s star performers so far, suggesting it may pay to drill into an exciting investment market with a growing number of products allowing you to target niches and sectors.

https://realmoney.thestreet.com/investing/global-equity/is-india-the-next-china–16127137