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From: Money and Markets <eletter@e1.moneyandmarkets.com>
Date: 17 February, 2011 4:30:45 AM PST
Subject: India's New Bear Market
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MONEY AND MARKETS » Thursday, February 17, 2011 YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON'T GET FROM WALL STREET
[«] Money and Markets Archive View This Issue On Our Website [»] India's New Bear Market by Ron Rowland
Dear Subscriber,
I'm not a buy-and-forget kind of investor. I like to rotate my portfolio and stay with the intermediate-term relative strength. Emerging market exchange traded funds (ETFs) frequently show up near the top of my rankings. So it's a happy coincidence that I see a lot of fundamental strength in them as well.
One of the biggest emerging markets is lagging behind the pack lately. I'm talking about India.
I gave you a rundown on India just a few weeks ago. ETFs covering this once-hot market have been some of the worst performers so far in 2011. They are all down more than 20 percent since November, which technically places India in bear market territory.
Why the weakness? Today we'll explore that question — and see if there may be opportunity in India soon.
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India: Land of Opportunity
India is the world's largest democracy. The four largest national economies in the world today are the U.S., China, Japan ... and India. This isn't so surprising if you think about it. With over a billion people, India is the world's largest democracy. Since economic reform unleashed market forces in the early 1990s, India has been growing like crazy.
So maybe the big growth is already past? No, I don't think so. It may be just beginning! Even after years of expansion, India is still a land where most people are quite poor by Western standards. This will change, slowly but surely.
So What's the Problem?
Recent action in India-focused ETFs doesn't seem so encouraging. Take a look at this chart of the iPath MSCI India ETN (INP).
From the early 2009 low through October 2010, INP rose 143 percent. But get this: Since early November through last week — a period of a little more than three months — INP dropped 24 percent. Talk about volatility!
What is going on? In a word: Inflation.
Food costs are a particular problem for India. We see the same thing here in the U.S., but for us it's not as painful. As a percentage of our income, food is a much smaller cost for us. For folks in India who make only pennies a day, feeding their families can take almost everything.
Food prices are climbing sharply in India. The inflation is a result of massive money creation by central banks around the world following the 2008 financial crisis. Many — including our own Federal Reserve — are still engaged in "economic stimulus."
The monetary authorities knew from the beginning they would have to "withdraw liquidity" at some point. In India, they've already begun. Interest rates are rising and stocks — especially bank stocks — are falling.
We've seen this cycle before in other places, and it is just that: A cycle. Eventually it turns. I can't say when it will happen in the case of India. But I am very confident that India's economy and stock market will move back up at some point.
Here are a few ETFs and ETNs you should keep your eye on ...
iPath MSCI India ETN (INP), mentioned above, is the oldest and largest of the India exchange-traded products. Do be aware, however, that this is an exchange-traded note and not an ETF. Click here to learn how ETNs are different.
WisdomTree India Earnings (EPI) is a true ETF and also very popular. The portfolio follows WisdomTree's unique fundamental-weighting approach that gives a bigger allocation to more profitable companies. PowerShares India (PIN) is another large-cap India ETF.
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iShares S&P India Nifty 50 (INDY) is newer and less actively traded than EPI or PIN, but still worth a look.
EGS Indxx India Infrastructure (INXX) zeroes in on what may be the most attractive part of the Indian stock market: Physical infrastructure spending. As the nation prospers, people are buying cars. Meanwhile truck, air, and railroad traffic is all on the upswing. Cities that were once mostly dark are being electrified. Building out the structure for all this modern innovation is expensive — but it has to be done.
Betting against India is a risky proposition. But if you think its stock market decline has further to go then consider Direxion Daily India Bear 2x (INDZ). It is an inverse-leveraged ETF that is designed to move 200 percent opposite the price performance of the Indus India Index. It has already gained more than 40 percent in India's new bear market, but can give it back just as fast.
Should you rush out and buy any of the bullish India ETFs right now? Probably not. India's market may get worse before it gets better. Add them to your watch list, though. The time to buy will come someday.
And for clear, concise alerts on when to get into an ETF — and when to get out — take a look at my International ETF Trader.
Best wishes,
Ron
Ron Rowland is widely regarded as a leading ETF and mutual fund advisor. You may have read about Mr. Rowland and his strategies in publications such as The Wall Street Journal, The New York Times, Investor's Business Daily, Forbes.com, Barron's, Hulbert Financial Digest and many more. As a former mutual fund manager from 2000 to 2002, Ron was a pioneer in using ETFs inside of mutual funds. Today, he is the editor of International ETF Trader, dedicated to helping investors use ETFs to profit from ever-changing global market conditions.
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