India...When was the last time a circuit-breaker tripped on the upside?

Traders and others who follow the markets daily may know the answer but I can't think of another time a circuit-breaker tripped on a bullish rally. It looks like the Indian stock markets were halted for the day after they rallied more than 17% in one day:

A deluge of buy orders greeted Indian shares Monday, propelling the country's benchmark stock indexes higher by more than 17% and triggering market circuit-breakers to force an early suspension of the day's trading.

Mumbai stocks leapt right off the blocks on optimism that the Congress Party-led alliance's victory in the just-concluded general election will result in a more market-friendly economic policy.

Within moments of the markets opening for trade, the Bombay Stock Exchange's 30-stock Sensex and the National Stock Exchange's 50-stock S&P CNX Nifty surged by nearly 15%, triggering a trading halt for two hours. Immediately at the resumption of trade, they surged further, prompting a trading suspension for the rest of the day.

That's a huge move even for an emerging market. Usually markets decline a lot but they rarely move up.

The strong market rally is due to the national election but I wonder if there is too much hype. Similar to the Chinese stock market and that of many other emerging markets, I believe the Indian stock market resembles more of a casino.

In the prior term, the government had to ally with far-left parties, such as the various incarnations of the Communist party, whereas they don't need their support going forward. The alliance with the Communists made it difficult to carry out some free-market-oriented reforms in the last term but it remains to be seen what can be accomplished given the economic slowdown.

My View of India Hasn't Changed

I have always been bearish on India, at least ever since I started investing (for real) 5 years ago. Initially my concern was valuation. Most Indian stocks seemed overvalued. India has capital controls so it's almost impossible for foreigners in invest in their local market. So one is typically limited to buying NYSE-listed stocks. But, on top of the valuations being high based on fundamentals, the NYSE-listed stocks used to trade at huge premiums to the Indian-listed ones (this was the case a few years ago but not sure now.)

Having said all that, I was probably wrong--not sure yet. Although valuations were high, the growth actually came through so the stock market has actually gone up quite a bit. Even after the crash over the last two years, it's still about 2x the 2004 levels (in nominal terms; real returns will be slightly lower but should still be a large positive number.)

This is an example of a situation that value-type investors will generally miss. Similar to growth stock investing, genuine emerging market growth can overcome seemingly high valuations. If anyone wonders why people invest in ridiculously high prices, it's because growth can overcome the valuations. Just like how people bet on tech stocks even with high P/E multiples, a lot of people do the same with emerging markets. If they are right, they will do well.

I'm still unsure of my incorrect view and am still maintaining my bearish view for another reason. I haven't check the numbers recently (I doubt they changed) but, as I have pointed out before, India runs a current account deficit (China doesn't; Brazil doesn't.) There is nothing wrong with a current account deficit per se. Those who defend current account deficits point to USA or Australia in the last few decades as examples of countries that have grown by utilizing foreign funding. But the long-term consequence is uncertain. One thing that is certain is that current account deficit countries are vulnerable to foreign capital flight. I'm not predicting this but there is a non-trivial probability of a credit bust unfolding in India. Similar to how many Eastern European countries are facing a credit bust because foreigners (basically foreign banks) are unwilling to finance their consumers and businesses, a similar thing may occur in India. However, since India is a developing country and the economy is still largely unsophisticated, the impact may be limited (e.g. most people are still poor and they have no access to credit; businesses also don't have easy access to credit and don't really borrow from foreigners.) But it's something to be wary of.


  1. Wow.  The market is always making me question my assumptions.  I like to view myself as a long-term investor.  I've always wanted to be invested in India and China.  In fact I feel uncomfortable whenever I'm not invested in emerging markets.  When I started investing back in 2006, the valuations were obviously too rich for me, and so I just waited.
    Eventually India fell far enough to interest me, and I put about 5% of my portfolio into EPI, which is a Wisdomtree fundamentally weighted ETF (earnings weighted rather than market cap weighted).
    This data is hard to find, but at the time (Nov 2008) I estimated the PE ratio of the Indian market at around 10, which looked to me like a growth stock selling at value stock prices.  Since then, the Indian market has increased by over 70%, and I estimate its PE to be around 17 or 18.
    Usually my timing is not this impressive (or lucky?), but here I am 7 months later, seriously thinking about selling my 'long-term' investment.
    I liked entering India at an attractive price, but my real goal was not speculation, it was to expose myself to the long-term growth of the Indian economy.  So do I now act like a speculator and sell for a nice short-term gain?  I wouldn't buy at this price, so does that mean I should sell?
    I need to re-think some of my assumptions, especially when it comes to volatile assets like emerging markets.

  2. As far as premiums go, EPI last traded at 17.16, and Wisdomtree currently lists the net asset value at 16.97, so EPI apparently trades at about a 1% premium.  I seem to remember a similar premium when I bought EPI 7 months ago.
    I dislike premiums, especially since the ETF already has a 0.88% expense ratio, but this is within the bounds of reason, and didn't really affect my decision.

  3. Congratulations on getting the timing right. Good job :)
    Selling out may make sense if you think the market is overpriced and decline. But if you don't think the market will decline, then holding the assets may be a better decision. LOL I guess that's obvious.
    It's hard to say what is the right decision when a sector or country bet does really well. If this were an individual company, the decision would be easier. If the company had high returns or a wide moat (say high ROE or strong brand/franchise or something), then it is worth holding even if it rallies above what you think is fair value. You would have a really low cost base and you may never find another company as good.

  4. I rarely have an opinion on price movements.  I expect India to trade in a wide P/E range, from say 8 to 35, as sentiment shifts over time.  At a P/E of 17, I have no prediction where the P/E will go next.  What I do expect is for the E part of that equation to increase at a decent pace, yielding reasonable returns, if the P/E can remain around 17.

  5. I have been doing some research to see if I can find a compelling replacement for my India ETF (which I will hold unless I find one).  I thought the readers of this blog might be interested in data I've collected on country specific ETF valuations.
    Country    Ticker    P/E    P/B
    Brazil        EWZ    13.5    1.4
    Canada     EWC    15      1.6
    Chile         ECH    17      1.8
    China        GXC    13      1.8
    Germany    EWG   13      1.3
    India         PIN    18       2.8
    Japan        EWJ   20.5    1.0
    Malaysia    EWM  15.5    1.7
    Mexico      EWW   14     2.3
    Russia       RSX    6.5     0.4
    S. Africa    EZA    12     1.8
    S. Korea    EWY    15    1.3
    Singapore  EWS    16    1.4
    Taiwan    EWT    21.5   1.4
    Turkey    TUR       11    1.5
    USA        SPY      14    1.8

    This data is collected from Yahoo finance, which gives P/E and P/B data current to 3-31-09.  I have adjusted the values to account for current market prices.  For example if an ETF is trading 20% higher than on 3-31-09, then I simply add 20% onto the P/E and P/B values.  I have chosen the broadest most normal ETF I could find.  Most of these are MSCI Ishares ETFs.  I chose PIN to represent India instead of the EPI I own, since EPI is earnings weighted, which is a bit exotic.
    The usual disclaimers on data accuracy apply.
    In particular these Russia numbers look suspicious to me and I will check into it.

  6. Six-point-five is kind of low for Russia but it doesn't surprise me. It's mostly made up of cyclicals and it has been hammered hard due to a whole hoard of concerns, including currency weakness, concern over property rights, political issues, etc.
    However, the price-to-book looks really low. I always talk about Japan being low but 0.4 seems extremely low. There is a possibility that the ETF is too narrow and has too few components.

  7. Yahoo provides a good service, but their data is sometimes spotty.
    The Russia ETF's issuer lists RSX as having a PE of 11, and PB of 1.5, as of 4-30-09.  Since RSX is up 22% since then, I estimate their PE at over 13, and PB at 1.8.
    I don't know where Yahoo got a PE of 0.4. 
    Anyway, given the political and currency risks, on top of questionable data, Russia looks a bit risky for me.

  8. If I get a chance, I'll see if I can dig up some metrics, similar to yours, and see if they are consistent with your observations.
    Apart from macro views, one thing that keeps me wary about some foreign markets is that, even if they are cheap, they are (i) not shareholder friendly and/or (ii) don't have good returns on capital. I have looked at many Japanese stocks and they are cheap based on most value-investing metrics, such as book value, but their ROEs tend to be really low. Even if the economic growth is strong, I'll bet that many companies in those countries will underperform American ones.

  9. OK.  About 2 months have passed since we last posted here.  I sold EPI a few weeks ago about 12% above where it is now.  I had (and have) no strong opinion on stock price movement in India but the risk/reward no longer looked compelling to me.

    I've now decided to put most of my funds from EPI into GULF, a Wisdomtree dividend-weighted ETF tracking middle eastern markets.  There are all kinds of political and economic reasons to avoid this region.  The compelling factor for me is valuation.

    Most mid east markets were in a serious bubble in 2005, and then had a 2nd peak in 2008.  From the tops, they are off by 50%-70%, despite a bit of a recovery lately.  Wisdomtree lists the PE ratio on GULF as 7.2, with a dividend yield of 7.3%.

    It took me a while to hunt down data on these markets, so here are some links if you are interested.

    GULF index details:

    Qatar Stock Exchange data (highest weighted market in the ETF):

    Historical charts of mid east markets:

    This ETF will be about 4% of my portfolio.  I expect volatilty, and I'm willing to add a bit more money if the price will drop another 25% or so.

  10. I have zero interest in the middle east right now but took a quick look at your GULF ETF. I think it is ok as a widely diversified portfolio, which is what your strategy seems to be, but I really wonder about it. About 37% is in financials and I wonder how well they will hold up given the potential for a large real estate bust.

    Anyway, it's interesting to see someone plunging into the Middle East. I haven't encountered many investing in that region. Keep me posted on how your GULF does. It's definitely a rare one...


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