An analysis of 30 years of data in 15 emerging markets reveals that big money in the emerging markets is consistently made by paying attention to geopolitical events.
The key to profits lies in recognizing change before the crowd using a proven method such as the ZYX Change Method. The diagram below depicts the basics of the this method.
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Take a look at the long term chart of Morgan Stanley India Fund (IIF) and, see how it followed the five stages predicted by our method when the 2008 financial crash is excluded. Click to enlarge
Those who recognized the political change in 2003 made over 800% in about four years.
When all six screens of our method are used, more opportunities become available as shown by the successful calls of our alerts depicted on the chart of iPath MSCI India Index ETN (INP) that follows.
We may be closer than most investors realize to a big change in India. This presents yet another opportunity to make big money in India for those who have gained the wisdom to look beyond traditional fundamental measures. An analysis of the 15 emerging markets over the last 30 years shows that investors stuck in the realm of traditional fundamental analysis would have made very little money from 1981 to 2011.
The watershed event is the success of Anna Hazare. Hazare is a political activist who is beginning to garner a following similar to Mahatma Gandhi. He has just won a major victory; the government has agreed to an anti-corruption bill with teeth.
Rampant corruption has held back development in India. By some estimates, GDP growth in India would have been 2-3% more per annum if corruption was not so rampant. Traditionally, most political parties have had their share of corrupt elements. Leaders typically gave lip service to corruption but were never able to control it.
Anna Hazare's success is based on the foundation of the middle class being fed up with corruption. In India, the middle class has grown from about 8% of the population in 1980 to about 33% now.
For the first time, we are seeing the middle class at the cusp of changing the bureaucratic system that still shackles the economy. In the short-term, this may destabilize the economy, but in the long-term this is the start of the second leg up for the modern India.
Those who are not well informed may question the premise of this article by stating that it is no big deal that one political activist succeeded. Times of India, a major well respected Indian newspaper, answered those not understanding the watershed event as follows:
"It is the rise of the middle class, stupid."
Traditionally, government programs have been directed at the poor, and the middle class was ignored. This is the first time we are seeing the middle class becoming politically active and succeeding. This is akin to what was happening in the United States in the 1940's and 1950's.
The larger the middle class, the greater domestic consumption. As the west stagnates, the next leg of growth in India will come from higher consumption by the expanding middle class. Decrease in corruption will not only increase the ranks of the middle class, but it will also increase disposable income.
We have now upgraded India to Mild Buy in the short-term. The point is for the aggressive investors to start accumulating India right here.
Conservative investors need to wait to confirm the start of the second leg up in India’s growth. Our models are showing that rate of increase of inflation is slowing, and ultimately, the policies of the Reserve Bank of India will be successful.
Those readers who have even taken a superficial look at India already understand that growth rates in the range of 6% to 9% are obvious in the foreseeable future. From an investment point of view, the Indian stock market is not driven by growth rates, but by political developments and the inflation rate. Our analysis from shows that the rate of rise of inflation is slowing. The monetary policy of the Reserve Bank of India has been extremely tight and is beginning to succeed.
We track indicators in 10 different categories for 15 emerging markets, geopolitical indicators being one of the categories.
The composite result of our indicators in 10 different categories for India for the short-term is neutral. Here is the breakdown.
- Economic Indicators: Negative
- Fund Flows: Negative
- Commodity Price Movements: Mildly Positive
- Relationship Between Currencies: Mildly Positive
- Sentiment: Neutral
- Earnings Momentum: Mildly Negative
- Risk Appetite: Neutral
- Quantitative Indicators: Mildly Positive
- Technical Indicators: Positive
- Geopolitical Indicators: Very Positive
A breakdown of each category of indicators is beyond the scope of this article. However, as an example, the economic indicators category includes the following:
- Wholesale Price Index
- Consumer Price Index
- Domestic Automobile Sales
- Software and Services Exports
- Manufacturing Purchasing Managers Index
- Import Data
- Export Data
- GDP Data
- Industrial Production
Astute readers will ask how do we square neutral indicators with an upgrade to mild buy. First, it is important to note that we provide ratings for short-term, medium-term, and long-term. Ratings for medium-term and long-term have previously turned positive. Now, with the new watershed event, a mild buy rating for the short-term is called for.
The best way for most investors to take advantage of this upgrade is to buy an Indian ETF that is appropriate for the prevailing market conditions. This article is tagged with a number of available ETFs and funds.
Disclosure: I am long INP.