Some Investors Look to Indian Stocks for Bargains

Bombat Stock Exchange, India

While stocks in emerging markets such as India generally lag U.S. stocks considerably, they do have their time and place. This looks like it may be the time and place to act.

Many investors don’t put much thought into their decisions, and will instead just follow popular investing ideas just because they are popular, with neither the investors or the proponents of these ideas being all that aware of what the net benefits or costs of these strategies may be.

The idea that we should diversify our investments for its own sake is clearly one of these. While there are circumstances where we at least need to entertain the idea of diversifying, and while there may be some situations where a certain amount of diversity is a good idea, it certainly isn’t a good in itself and can often be bad and reduce our expected profit while not providing a corresponding risk reduction that we need to make sense of such a thing.

Our current situation is a perfect example of how diversifying your stock positions just doesn’t help, as stocks from one corner of the Earth to another have taken a big beating now. We may even have to bear the indignity of seeing positions that are supposed to be reducing our losses cause even greater losses, if you have some of your stocks in other countries where the toll has been even greater, and not only enjoy lesser returns overall but bear even more risk.

The saddest part of this ordeal is that a lot of investors seek diversification as an alternative to manage their positions properly, as they either feel too inept or are even too lazy to do so. If you are afraid of bears, trying to wrestle bears with a leather suit on might seem like a good idea, and may even limit the degree of mauling you suffer, but just running away from them is a much better idea.

There are certain risks that we can’t manage, like for instance an outbreak of war that happens overnight and unexpectedly, where we don’t have a chance to react in a timely enough way, and we may want to hedge these risks somewhat even though they are so rare, but only to the degree that it makes sense to. Hedging to try to compensate for not acting sensibly isn’t sensible at all though, even though the great majority of investors may not understand the lack of sensibility involved.

It can be perfectly fine to hold international stocks if there is a reason to do so, but only if there is a reason. Some people believe that the underperformance of these stocks may be subject to a reversion of the mean, where they have run behind so much for so long that the investment gods will change their mind and reverse the situation, but putting your faith in mythology with investing is never very wise.

There are others who may look at a country’s GDP growth rate, like India’s and see it three times what the U.S. GDP growth rate is, and think that this looks like a sweet deal. They don’t realize that the inflation rate in India is three times higher as well, and this ends up being a wash at best, although lower growth and inflation rates are preferable in themselves and provide a greater level of stability among other benefits.

Since we are talking about stocks though, we can’t just look at macroeconomic data and infer that differences will translate to stocks, as stock markets are entities unto themselves and are influenced by more things than economic data. India, for instance, has a much lower per-capita GDP than the U.S., and therefore have considerably less money to invest in stocks, and the high interest rates that banks pay for savings serve to tempt people a lot more, even though the difference is nominal and if you get 6% interest but inflation is 6%, you’re not making any money from this in spite of the illusion.

The only way to compare stock markets is to do so directly. While Indian stocks are traded on Indian stock exchanges, and even India’s biggest company, Reliance Industries, can only be traded on Indian exchanges and on the Luxembourg Stock Exchange, for the last few years, American investors can trade Indian stocks through funds such as the iShares MSCI India ETF.

Diversifying with Funds Can Make Sense Sometimes

This is actually an example of where it makes sense to diversify, at least as far as going with a fund over individual stocks. Not only does such a fund make these international stocks accessible, we really don’t want to be venturing off too far afield, which requires more intimate knowledge of these stocks than we may have, as well as taking on the greater risk of volatility that some of the more thinly traded issues involve.

People love ETFs though, and will prefer them over building their own portfolios of stocks even when they can and even when it may be desirable, but these international funds are definitely the more desirable approach and may even be the only way to do it practically.

This also provides us an opportunity to compare markets, to not only see how we would have done over time with this fund compared to an index fund such as the S&P 500, we can also look to spot opportunities that may arise from time to time that may at least have a fund such as the iShares India worth a close look and perhaps even offer additional value.

Our Indian fund has been around since January 30, 2012, and we can start by having a peek at how this has done since. It has actually lost 5% over this time, and although this does include what it has lost over the last few weeks, we can apply the same period to the S&P 500 and see it up 106% instead. This is not even close.

This does not mean that the Indian ETF does not necessarily have its time and place. Often times, something that will rattle U.S. markets will not translate to stocks in other countries so much, and a good example would be the sell-off in the final quarter of 2018 that rocked the U.S. stock market from fears that the Fed would keep upping interest rates.

Instead of being beaten up by 20% in this quarter like the S&P 500 was, the iShares MSCI India ETF gained 12% over this time. It had already come off a stiff decline over the preceding 2 months and gained most of it back over this quarter.

This Indian ETF therefore has its time and place, if we pick our spots right with it. We might not think that this is the time and place for this move, as both markets have been beaten up pretty badly lately, and it should be easy enough to make plenty of money holding U.S. stocks on the way back up from being so oversold.

We need to start by looking at how much room there is on the journey back for both, even though it may be too much to hope that we’ll make it all the way back with either during this current run. Stocks will end up taking a hit from all this when it’s all said and done, just not as big of a hit as they took during their panic selling phase, but it still is important to know how much room we have to help measure the potential.

The S&P 500 is still 21% away from its February peak, while the iShares India ETF has 38% of room. That’s more potential at least, and score one in favor of India with this one.

The Skies Are Not as Dark in India as in the U.S., and This May Matter

That’s not the biggest reason why we might want to take a chance on India, or at least have some of our money invested over there, as we don’t want to decide so easily and need to go into whatever other reasons there may be to do this.

The sell-offs with stocks may have been universal, but the recovery may be less so. People are even talking about U.S. stocks dropping even further than they were at the bottom, and we know that when earnings start coming out, we may see a real jolt for a time anyway. This isn’t to say that the same thing won’t happen in India, but the dynamics are at least different and this is a case where diversity may be in our favor, by investing in both and needing bad things to happen to two markets instead of just one.

Perhaps the most appealing part of this play is the different ways in which the proximate cause of this sell-off, COVID-19, has affected both countries. The U.S. has already suffered 62 deaths per million, which may not be that big of a number, but is one that has weighed very heavily on the American people, and is expected to triple from here.

India, on the other hand, has only suffered 0.2 deaths per million people so far, and while that will go up as well, 0.2 is a remarkably smaller number than 62. The Indians are experiencing a lockdown as well, but they got well ahead of it, like China and South Korea did, while in the U.S., we waited until the situation was much worse to put these measures in force.

India has just decided to extend their lockdown until the end of April, similar to what Trump wants, but Trump doesn’t get to decide this and the expectation in the United States is that several big states, especially New York, may prolong this considerably longer.

These shutdowns have really taken their toll on both countries, as these extreme measures do, but the brighter outlook in India does seem to lend considerable support to their stocks recovering in a timelier way. With stocks, time is money, and this isn’t just about how much we can make in the end off of this, it’s also how quickly we can make it, as if we can cash in earlier and find another way to profit, that’s simply better every time.

Whether India decides to get back to normal sooner or not, they are certainly in a better position to do it sooner, and given that this is all about this virus, the virus definitely matters.

We shouldn’t want to put all of our eggs in either basket this time, even though normally a U.S. basket is significantly preferable, but not always. The iShares MSCI India ETF therefore looks like it could be a nice addition to the portfolios of those who do wish to diversify with it, even though diversification is usually quite overdone. Sometimes it does make real sense though.

Eric Baker

Editor, MarketReview.com

Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.

Contact Eric: eric@marketreview.com

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