By David Goodboy
I talk with a variety of investors on a daily basis. I truly enjoy the interactions as I often learn something new. In addition, the conversations provide a real-time feel for the day's investor sentiment.
One recent conversation with a seasoned stock investor from the West Coast was particularly revealing. As we talked about my recent article on Ray Dalio, the famous hedge fund manager, this investor could not understand how Dalio could be diversified across such a large number of uncorrelated investments. He insisted that most all domestic stocks, commodities and currencies are correlated to some degree.
While I don't completely disagree with this thought, my first reaction was that his thinking was very single-minded. I asked him if he ever considered frontier or emerging markets as a way to diversify. "No way!" he exclaimed. "That's too much risk."
I replied, "That's a sure way to gain generally uncorrelated diversification from the U.S. stock market." He mumbled something and went on his way.
This conversation taught me that many stock investors, even very experienced ones, refuse to look outside their comfort zone for investments. Not only are uncorrelated investments for diversification purposes found in non-U.S.-based stocks, huge profit potential also exists in these emerging markets.
Today's investors should open their minds to different global stock markets as a means to find the best opportunities. Fortunately, the popularity of exchange-traded funds (or ETFs) makes it easy for stock investors to gain exposure to new markets.
I find India to be the most compelling emerging market for stock investors. Indian stocks are sharply lower with the Sensex down over 1,000 points in August alone and the Nifty 50 index off by 8% in the same time. Not only have stocks plunged, India's fiscal deficit, inflation, and weak growth projections have sent the rupee, India's currency, to a new recent low tick of 68.75. In addition, fears of military escalation in Syria have added another layer of fear over India's already beaten-down financial markets.
These issues are exactly why I find Indian stocks to offer an ideal opportunity right now for savvy investors. Money is made buying low and selling high in the stock market, and now is when to buy India at a sharp discount.
The Indian government has recognized the problems within the economy and has vowed to do everything to support it. Prime Minister Manmohan Singh has said: "We will leave no stone unturned to ensure that the economy rebounds." He added that the government will remain proactive to promote growth. Finally, channeling a true free market capitalist, Singh said, "When things are going well, the government should interfere as little as possible."
As we have seen in the United States, central banks are powerful tools for economic stimulus. Based on Singh's words, I think the bottom is either very close for India's economy or already at hand. Bearish forces simply cannot resist bullish governmental action for very long. In addition, Syrian tensions are weakening, currently providing footing for European shares, and this bullishness should follow through to emerging markets.
The ratings agency Fitch recently affirmed that India is not in danger of a credit downgrade, but India is presently rated at the lowest investment grade of BBB-. However, if Singh does not follow through with his words, the nation could be downgraded.
Due to the economic difficulty, investors have punished the iPath MSCI India ETN (NYSE: INP). Just over the last month, investors have dumped over $37 million from the exchange-traded note. In addition, net fund outflows from India hit $300 million in August. This sharp selling and bounce from the lows is why I like this ETN. Buying on the first signs of a bounce, after everyone else has thrown in the towel, is a proven investment method.
Let's take a closer look at this ETN, which comprises the largest 68 companies traded on the Nation Stock Exchange of India. It's part of the Barclays fund family and boasts assets of just over $370 million. Its expense ratio is 0.89%, and the annual turnover is zero.
Technically, shares have finally hit support at $42 and have bounced to the $45 level, setting up a potential breakout buy opportunity.
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Risks to Consider: Despite my confidence, India remains a very risky economy. Some experts believe that things are so bad that even massive government intervention will not bring back growth. This investment is only suitable for investors who understand the high level of risk involved. Always use stops and diversify when investing.
I like the iPath MSCI India ETN as a channel entry strategy. This means I will buy on a retrace to $42 or on a breakout above $46. If the retrace entry is triggered, stops should be at $39. The breakout entry will require the stop level to be at $44. My 12-month target is $53.