In India, Toilet Paper Becomes More Valuable Than the Rupee
India is slowly, or rapidly, becoming a complete financial disaster. Growth has slowed and the nation is trying to do what it can to fight inflation while still trying to juice up the economy. India is one of the great BRIC emerging market nations, but it is not living up anywhere close to its potential. So, the question is, what can they do now that the rupee is hitting yet another all-time low?
Wednesday’s closing levels in India should alarm investors of emerging markets and developed markets alike. The Hindustan Times confirmed that the rupee at 68.80 is the lowest official close. Some are trying to blame the possibility of war or military conflict in Syria, but this one-way ticket to financial hell in India is more of a unique situation than it is a global one.
Even the BSE Sensex, what used to be known as the Bombay Stock Exchange, has now suffered another 500 point plunge before recovering. We recently warned that emerging market investors would try and try to remain patient, up to a point, but capital is exiting the nation rapidly and investors have decided for now to not allocate new capital into India.
Calling a bottom based on technicals and oversold sentiment is easier to do in developed markets, but many investors do not give the same feelings in emerging markets because they want to enter these markets when the fundamentals merit a long-term investment. Most longer-term investors and traders do not enter emerging markets for a quick in-and-out trade of a few percent, but rather for serious gains over a longer period. The situation is bad enough that trying to be a bottom fisher may simply resemble being a bottom sniffer.
India is a market and economy with great promise. Its growth generally rivals that of China and its population is over 1.2 billion. It is also a young population, and one that is still growing. Unfortunately, its policies are not working and its infrastructure is simply not up to date in a manner that can support its full potential growth rate ahead. And at the end of the day, the country simply has to develop internal growth, as it cannot simply rely on being an outsourced-IT and outsourced call center nation for the rest of the world.
We previously said that the Indian rupee is becoming worth less than the paper it is printed on. Unfortunately, toilet paper is holding its value in dollars better than the nation’s currency. The WisdomTree Indian Rupee (NYSE: ICN) hit a new low of $17.42 and the exchange-traded product is down 2.6% on last look. Its price chart looks like a downhill ski slope, with the end being a cliff rather than the ski lodge.
WisdomTree India Earnings Fund (NYSEMKT: EPI) is down yet another 2.7% at $13.05, and it hit a new low of $13.00 on Wednesday against a high of $20.50. The PowerShares India (NYSEMKT: PIN) is down another 2.5% at $13.54, and it hit a new low with its 52-week range now at $13.50 to $19.66. The India Fund Inc. (NYSE: IFN) is a closed-end fund rather than an exchange traded fund (ETF), and it is down almost 1.75% at $16.95, with its shares hitting a new multiyear low of 416.88, against a 52-week high of $24.10.
Market Vectors India Small-Cap ETF (NYSEMKT: SCIF) is down almost 3% at $22.38, and the new low was put in today, with its 52-week range now being $22.25 to $46.60. This one is now down over half from its high and without any extreme leverage other than holding smaller stocks.
If good old regular emerging stock market losses are not daring enough for you, there is the triple-leverage suicide show for true gluttons for punishment. The Direxion Daily India Bull 3X Shares (NYSEMKT: INDL) is down another 7.5% to $27.62. and its new 52-week range is $27.20 to $99.20. Imagine an ETF with leverage so high that you can take losses of greater than 70%, and that is even after the fund announced a reverse split effective as of August 20.
Here is why there is so much promise in India. GDP growth had averaged about 7% since 1997, but now India’s growth is slowing down to what might as well be recessionary. Its localized inflation seems to be a mystery to outsiders when you consider that it implemented reforms and deficit reduction measures to reverse its slowing growth. The nation’s gross domestic product was $4.76 billion in 2012 on a purchasing power parity basis, making it the fourth largest economy in the world with some 6.5% growth.
We previously noted, indicating levels right around now, that if India’s stock market and currency were to fall another 10% or 15% then the foreign capital outflows might create true economic and market panic. That is the risk right now, so things either are going to suddenly get much better with a new set of policies or India is about to jump off the cliff.
See also: Can Raghuram Rajan save India?
Unfortunately, emerging market investors now have to wade through territory that they might have only worried about back in our own recession. It is sad to report that the BRIC nations may just be the new PIIGS. It is a sad day when owning toilet paper is better than owning paper money in a country.