India -- one of the year's worst hit
this year -- staged a dramatic turnaround in October, soaring to
a record high in local currency.
India mutual funds rallied 10.68% in October although they're
still the year's worst-performing region, down 12.98%. By
contrast emerging-market funds added 4.22% in October, lifting
year-to-date gains to 1.33%. The average world equity fund rose
3.51% and 14.27% over the same periods.
The most significant catalyst in turning around
was Raghuram Rajan, former chief economic adviser of the Ministry
of Finance, taking over the Reserve Bank of India, says Neena
Mishra, director of ETF research at Zacks Investment Research in
Rajan announced several measures to halt inflation, make the
financial markets more open and competitive and strengthened the
rupee, which had rebounded 12% off its late-August low.
"I believe that sustained recovery in the market would be
possible only if the Indian government shows the willingness to
implement key structural reforms and curb the widening fiscal
deficit," Mishra said in an email. "But with elections due next
year, any significant push to reform or to curb populist measures
like ballooning subsidies should not be expected anytime
India's economy has also benefited from a correction in crude
oil prices -- one of its biggest imports -- and corporate
earnings surprises. From a high of $112 a barrel in late August,
light sweet crude has tumbled 14% to $96 currently. India's stock
rally has been fueled mainly by the exporters whose profits are
being boosted by a weak rupee, says Alec Young, global equity
strategist at S&P Capital IQ.
"There are few signs of a real pickup in growth," he said.
The central bank raised the key interest rate for a second
month straight in late October to 7.75% to control inflation.
Inflation, currently running at 9% for consumers and 6.5% for
wholesalers, far exceeds the bank's comfort zone of 5%.
The RBI will likely have to raise rates by 25 basis points
again at its December meeting and it will take 12 to 18 months
for the economy to feel the results, Credit Suisse analysts say.
The country's current account deficit is larger than it was in
the run-up to the Asian financial crisis, Credit Suisse wrote in
an Oct. 29 Global Equity Strategy report.
Yields on India's 10-year bonds have surged to 8.63% at
month's end. That's nearly on par with Greece, one of the world's
most poorly rated debtors. The current account deficit at nearly
5% of GDP (vs. a sustainable level of 2.5%) and rising interest
rates could push the country's credit rating into junk territory,
says Surendra Kaushik, a professor of finance at Pace
University's Lubin School of Business.
"The political environment, excessive public spending programs
on consumption, labor market imperfections, corruption and low
business confidence are likely to keep things the way they are
for a while," Kaushik said in an email. The government will not
likely pursue aggressive economic reforms in the near future with
elections in five states in December and national parliamentary
elections in mid-2014, he added.
China funds added 2.95% in October and 7.72% year to date.
Latin America picked up 2.57%, paring year-to-date losses to
Investor Fund Flows
In October, investors poured $54.2 billion into all-stock
mutual funds and exchanged traded funds -- the third-highest
monthly inflow on record, according to TrimTabs Investment
Research in Sausalito, Calif. Global equity funds absorbed $27.6
billion in inflow, eclipsing inflow of $26.7 billion into U.S.
What's most remarkable is that global funds have only about a
third of the assets of U.S. stock funds at $2.2 trillion vs. $6.0
trillion. Global equity funds have absorbed disproportionate
inflow for three straight months. They attracted $61.4 billion
from August through October vs. $17.9 billion for U.S. stock
"Fund investors tend to be wrong, and recent flows have been
skewed enough that we think contrarians should consider favoring
U.S. stocks over offshore stocks," TrimTabs wrote in a report
released Monday. "Our demand indicators (which use 21 flow and
sentiment variables for intermediate-term market timing) suggest
the U.S. stock market may struggle to move much higher over the
short term, but that the longer-term uptrend is secure. While the
S&P 500 is up 23.5% year to date, our indicators do not point
to a major sell-off anytime soon."