In fact, it’s not in the U.S. at all.
The breakout is in India. But that can’t be, you say. India is a member of the “fragile 5.” It is supposed to be in a “crisis” of epic proportions with runaway inflation and a plummeting currency.
Well, I’ll let the chart below respond to these assertions. In the top panel, you’ll notice the Indian Rupee (ICN) hitting new year-to-date highs. In the middle panel, you’ll notice that the India Fund (IFN) is breaking out to new multi-year highs.
Finally, in the bottom panel, you can see that India’s relative strength is also breaking out versus the S&P 500 (SPY).
This chart is of course wholly inconsistent with the notion of a “crisis.” You have a strengthening currency, a stock market at multi-year highs, and a country that has been outperforming the U.S. market in 2014. You also have a central bank led by the highly respected Raghuram Rajan that has already raised interest rates three times in the past year.
Still, many will remain unconvinced as the wall of worry in Emerging Markets remains high, especially given the recent news out Ukraine. This couldn’t be more bullish from a contrarian standpoint, with a market hitting new multi-year highs and sentiment still extremely negative.
Additionally, the bearish sentiment is factually flawed, as people are lumping all Emerging Markets together and assuming somehow that the developments in Ukraine will have a particularly negative impact on India. I can assure you, they will not. The U.S. certainly has more at stake in Ukraine than India and the U.S. equity markets don’t seem to be pricing in any negative repercussions as they are sitting at all-time highs.
Notwithstanding this logic, though, most investors will need to hear of a “catalyst” or a sustained period of positive news before investing in India. As markets tend to lead the narrative, though, you can expect prices in India and other Emerging Markets to rise substantially before hearing any good news.
As I wrote in a recent article, Buffett’s words are instructive here: If you wait for the Robins, spring will be over.
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