India: A Lesson in EM Investing 101

Politics will always reign in GEM markets. Prime Minister Manmohan Singh became India's first prime minister since 1962 to win a second term in office. India is a rally based not only on the political mandate for the Congress party and smooth political transition in the world's largest democracy, but also on an expectation that there will be necessary reform that translates into economic growth.

The mandate now gives Singh the ability to push through three key reform agendas: insurance overhaul, private ownership in the banking sector, and pension reform. How quickly they move will be imperative to the sustainability of the rally, but it is reminiscent of recent election rallies.

Kuomintang's Ma Ying-Jeou won the presidential election in Taiwan last year, with the the promise of closer ties with neighboring China. In the first year, his administration has already reached agreements with Beijing to to allow direct flights across the Taiwan Strait. And Vladimir Putin, who was elected president of Russia in 2000, implemented a flat tax and worked towards the return of assets to the state.

It's dangerous to be short through an election cycle, even when the expectations were neutral to negative. India is not cheap at 16-18X forward PE, but one could argue that this market’s earnings have been dragged down by five years of government inaction to economic growth.

Buy high beta Indian stocks -- those with impaired balance sheets and corporate governance problems. This may sound strange, but they will outperform.

Here is a basic list of Indian ADR names to add to a watch list for India, which all trade in the US:

ICICI Bank (IBN)

Tata Motors (TTM)

Infosys Technologies (INFY)

Cognizant Technology Solutions (CTSH)

HDFC Bank (HDB)

Sterlite Industries India (SLT)

Wipro (WIT)

Sify Technologies (SIFY)

Rediff.com India (REDF)

Dr Reddys Laboratories (RDY)

Mahanagar Telephone Nigam (MTE)

Patni Computer Systems (PTI)

WNS Holdings (WNS)

Tata Communications (TCL)

Satyam Computer Services (SAY)