It's Not Too Late to Invest in India

 | May 22, 2014 | 3:30 PM EDT
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When momentous things happen in the world, I tend to wait for at least a few days before commenting. After nearly 20 years in the foreign-exchange market, I find that instant reactions, and all of the mistakes they lead to, are not just a recent product of the Twitter age. If the situation allows, a period of sober reflection is usually a good idea. As the old saying goes, "It's better to remain silent and be thought a fool than to speak and remove all doubt."

For traders and investors, though, there is a tendency to err on the side of another cliche: "He who hesitates is lost." If you don't react immediately, all of the value has gone, and you are just providing liquidity to those who reacted before you did. Which of these sayings is relevant depends largely on the time horizon of your investment.

If you are day-trading or looking for a short-term profit, then missing that initial move makes the trade unworkable. You aren't ever going to beat the computers or even the floor traders in reacting to news, but if you can beat the majority of those who are like you, you have a good chance of making money. If, on the other hand, you are looking at a long-term investment, then you should resist the temptation to react quickly.

These thoughts came to mind as I looked at the situation in India. As it became clear that Narendra Modi's Bharatiya Janata Party would win the election, Indian stocks, which had been depressed for some time, started to recover, as evidenced by the Wisdom Tree India Earnings ETF (EPI).

Once the election result was confirmed, EPI really took off. As somebody who writes about markets, I felt a strong temptation to give an immediate opinion. I resisted, though, because, as welcome as a change in government in India was from an economic perspective, there were some serious questions.

India is a unique place. It's the world's largest democracy and a country characterized by enormous religious and cultural diversity. The BJP's reputation as being a party of only the Hindu majority was a cause for concern for many. In speeches since his election, however, Modi has focused entirely on his economic agenda, not social or cultural issues. This isn't unusual in Indian politicians, but Modi has a chance to actually implement change rather than just talk about it. That is what an absolute majority gives.

In large democracies, particularly extremely diverse ones, large majorities can also be dangerous. Whatever a politician ran on during the election, the temptation can be overwhelming to revert to settling old scores immediately when given a free hand. Modi seems to have resisted this urge and has quickly quashed those within his party who couldn't.

If he is successful in reinvigorating growth and tackling unemployment, then the increases in the Indian stock market that we have seen over the last week or two will be only the start. As this Economist article points out, 30 years ago India's GDP per head was the same as China's; now it is one-quarter of it. There is plenty of room for growth.

Sometimes, caution really is the better part of valor. Given that a real transformation in India's fortunes will see the stock market double or more over the next few years, missing an initial move of 10%-15% doesn't look like too much of a problem. If missing that means that you can wait for confirmation that the economy was not just a convenient hook on which to hang some old religious rivalries during the election, then waiting is only sensible. 

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