“Darn the wheel of the world! Why must it continually turn over? Where is the reverse gear?” – Jack London
Hard to believe it, but the WisdomTree India Earnings Fund ETF (NYSE:EPI) is up nearly 36.5% so far for the year. That’s not even two whole months into 2012. The move higher is reminiscent of how India behaved relative to the S&P 500 in 2009. This ETF is a good proxy for Indian companies that foreign investors are allowed to invest in because it’s based on the WisdomTree India Earnings Index, which tracks those companies.
Take a look below at the price ratio of the WisdomTree India Earnings Fund relative to the iShares S&P 500 Index (NYSE:IVV). As a reminder, a rising price ratio means the numerator/EPI is outperforming (up more/down less) the denominator/IVV.
Click to EnlargeNotice the severe weakness in the ratio after having topped out in October 2010 as investors fled India due to a weak rupee on domestic inflation that seemed to be getting out of control. The bottom looks to have occurred in late December, with an enormous period of strength and leadership occurring so far in 2012.
The move is reminiscent of the spike in strength that took place following the March 2009 lows in global equities. Proactive measures on the fiscal side to bring more foreign capital into India also seem to be driving appreciation of the rupee, which itself is up strongly.
It’s important to note than when investing in non-U.S. dollar-denominated assets, total return is determined not only by the performance of that asset in local currency terms, but also by the performance of the asset’s home base currency. In other words, outperformance in EPI is as much a result of strength in India’s stock market as it is in the rupee itself.
Given how poorly the rupee behaved last year, EPI may still have quite a bit of room to run, despite the immense move so far. Just be aware of how important the direction of the rupee is.
The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.
