Last year’s rebalance saw a huge shift in weight to companies that were relatively cheap, which at the time were the stocks correlating highest to the rupee due to the crisis environment. At this year’s upcoming rebalance, after seeing large gains in these stocks, WTIND may potentially lower weight to them—especially if their recent performance trend continues. The key for understanding the process driving the WTIND: There is a dynamic process that identifies value, and last year that value was in the stocks with the highest correlation to the rupee.
The Indian stock market measured in local prices had already made new all-time highs, but the market measured in dollars would still need to appreciate more than 25% to reach its 2010 highs and more than 50% to reach its early 2008 highs1. Although the rupee has been a significant headwind for performance over the past few years, we feel the worst might be behind us and are intrigued by the recent relative strength of both the equity market and the rupee.
The landslide victory in the Indian election by Prime Minister Narendra Modi and his pro-business party has been supportive of the equity markets and currency. Also, the new central bank governor, Raghuram Rajan, has helped restore market confidence in the inflation-fighting credentials of the Reserve Bank of India, by proactively hiking rates to stem inflationary pressures last year. We are optimistic that a Modi-Rajan tag team may be able to rectify India’s fiscal house and unlock the country’s great potential through pro-business initiatives and reforms. If investors share this positive view on the currency and general economic potential, we believe that this market and EPI could be of particular interest.
1Source: Bloomberg, India stock market refers to the MSCI India Index, as of 5/20/14
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