Indian equities have dropped since the country scrapped some of its existing rupee notes. While Americans were going to the polls in November something big happened in India. India has presented an unexpected buying opportunity for nimble investors who don’t mind taking on some additional risk.
Without warning on Nov. 8, India’s Prime Minister Narendra Modi announced that the existing large denomination rupee notes would be scrapped. The idea was to help eradicate the endemic corruption that plagues the country.
Anyone holding such currency would need to swap the notes for new ones, and if they were exchanging more than a small amount of cash the owners of the currency would pay a tax or a fine to the government. That move took everyone by surprise, both domestic and foreigners. It caused many sorts of problems.
Specifically, the lack of cash, in what is an overwhelmingly cash-based society, squeezed the economy, bringing much of it to a halt. India had seen growth at a fair clip earlier in the year.
The Nikkei India Manufacturing Purchasing Managers index, which measures the health of the factory sector, dropped from 52.3 in November to 49.6 in December. (Readings of less than 50 indicate contraction in the sector.)
That, of course, sent equities in the country down. The iShares MSCI India ETF (ticker: INDA), which tracks a basket of Indian equities, is down 5 percent since the currency announcement. That compares with a 6.4 percent rally in the S&P’s 500 index. The decline in India’s equity market has stabilized over the past few weeks.
Why buy now?
This pullback should come as no surprise to investors. Still, the drop in prices now presents an opportunity for investors to jump into the Indian market. They might want to consider doing so because India’s cash crunch is likely to be a transitory problem.
Foreigners have a positive view for the medium-to-long term on India than Indians.
If you don’t mind holding on to your investments for a few years rather than a few weeks, then using the drop in equity prices as an opportunity to buy stocks at better prices might make sense.
Be warned that as with any investment in emerging markets there will be volatility. But with that additional risk should come the potential for better returns. Use it wisely.
India’s economic cycle is enviable within the emerging market space, it’s crystal clear that there are a lot of reforms that will be maintained.
Indian reforms include those aimed at liberalizing the economy by deregulating energy pricing, eliminating minimum pricing on agricultural goods and allowing greater foreign investment in key domestic industries. Such changes should help the economy attain a high rate of economic growth in the future, and provide a good backdrop for equity investors.
It’s also worth noting that prior to the ill-fated cash crunch India boasted stellar economic growth that was faster than China, which itself had been a standout of fast growth in the emerging world for years.
I suggest you to stay invested in-order to make use of this life time Indian opportunity.
Happy Investing !!