3 Plays on India's Emergent Middle Class
From engineering economic slowdowns to raising taxes, government intervention is the biggest detriment to market confidence today, Cramer said during Tuesday's Mad Money. So investors must find themes that are impervious to governments around the world, and Cramer thinks he's found a few.
On Monday, he discussed China's booming middle class. He's now turning his attention toward a similar theme: the ascent of the middle class in India. Cramer called the growth "unstoppable" and said there are several positive signs coming out of India right now. The Wall Street Journal reported that the Indian government wants to increase poverty benefits even though the country's official poverty rate has declined from 60% in 1981 to 42% in 2005. Because people tend to travel as they make more money, the chief of the International Air Transport Association is expecting increased air travel. And the IATA estimated that the middle class will triple in size to 3.5 billion people by 2050.
The present size of India's middle class varies by estimate, which ranges between 50 million and 300 million people — roughly equivalent to the entire US population. One of the more conservative estimates, though, comes from McKinsey, which in 2007 projected an increase from 50 million to 583 million by 2025 — a more than tenfold increase in the number of middle-class people in India. By 2025, India’s expected to become the fifth-largest consumer market, and discretionary spending should grow from 52% of the national income to 70%, Cramer said.
While the trend is massive, there simply aren't many individual stocks with exposure to India, Cramer admitted. There are only 14 Indian ADRs listed on the NYSE and the NASDAQ, he explained. Most are technology outsourcing or wireless communications companies, and most have too much exposure to other parts of the world. Yet Cramer has identified three ways to play this trend.
Indian Banks Fit the Bill
Cramer thinks Indian financial institutions are "terrific plays" on the growth of the middle class. As more people accumulate wealth, more people will save and there will be a greater use of financial services. He likes ICICI Bank , India's largest bank in the private sector and second largest overall.
"IBN is in turnaround mode right now," Cramer said, adding that the company is cleaning up its balance sheet and acquiring banks within India.
The Mad Money host noted IBN has aggressively cut costs and reduced their nonperforming loans from 2.2% at end 2009 to 1.8%. IBN is also growing their branch base, which is now up to 2,000 branches and recently picked up another 463 branches with its acquisition of Bank of Rajasthan.
Getting Into Infrastructure
"The growth of the middle class means more travel, more trade, more need for electricity, more need for clean water," Cramer said. "This is going to benefit the Indian infrastructure companies."
In the next few weeks, a new India-focused ETF will trade under the ticker INXX and is expected to invest in 30 companies involved in Indian infrastructure. It includes the largest gas transmission company in India and the largest private power utility. But Cramer added one caveat: "The INXX is more of a trading tool, not something you want to park in over the long-term. I would double the homework before investing in it."
"The mobile-phone market in India is huge," Cramer said. "The country has 600 million wireless subscribers, [and] 17 million more are being added every month."
Wireless provider Vodafone is a "stealth play" on India’s rising middle class, Cramer said. He recommended VOD on May 26 because of its 6.6% yield. Its 45% stake in Verizon Wireless is not factored into that number, Cramer said. He added that Vodafone owns 67% of the number-two wireless player in India by revenue, and India makes up 7% of the company’s total sales. Cramer said Vodafone has acquired more spectrum in India, so it can offer higher-end products, like the Apple iPhone 4, which it’s bringing to India in July.
When this story published, Cramer's charitable trust owned Apple.
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