India is the second largest country in the world in terms of population and the country has made great strides in its economy by developing a capitalist approach and adapting it to meet with Hindu traditions. The annual growth rate for GDP has been above four percent since we entered the 21st century with the exception of one reading and that came at the end of the global financial crisis in 2009.
As a developing nation, it is easier to maintain a high GDP growth than it is for a developed nation such as the United States. We see in the chart below that over the last 10 years, the U.S. hasn’t been able to get its GDP growth rate above four percent at any point.
What really stands out on the chart is how since early 2016 the GDP growth rate in the United States has been rising while it has been falling in India. Yes, the overall growth rate is still better, but the trends are moving in different directions. We see a similar pattern in the industrial production of each country. Industrial production in the U.S. has been climbing since late 2015 and it has been falling in India since early 2016. There seems to be a correlation between these two trends.
What is concerning is that the stock market indices for both countries have been rising since early 2016 and they have been moving higher at a similar pace. The Dow Jones Industrial Average and the Bombay Sensex 30 Index (BSE) have both been trending higher over the last seven quarters. The Dow is up 30.6 percent during this time period and the BSE is up 21.9 percent.
From February of ’16 through September of ’16, the BSE outpaced the Dow, but then pulled back as the Dow continued to climb. Since mid-November ’16, the performance of the two is almost identical with the BSE gaining 21.1 percent and the Dow gaining 20.3 percent.
While it isn’t unusual to see global markets trending together, it is worrisome that the economies of these two markets are moving in different directions. During the global bear market that came as a result of the financial crisis, the BSE lost more ground than the Dow. With many of the global indices hitting all-time highs and a correction seemingly overdue, a global downswing could take the BSE down further than other indices based on the trend in India’s GDP growth rate and industrial production.
To take advantage of a possible decline in Indian stocks, there are several India ETFs. The two most actively traded are the iShares MSCI India ETF (AMEX: INDA) and the WisdomTree India Earnings Fund (NYSE: EPI). Investors could short the funds or they could buy put options on the funds. A correction may not be imminent, but if we see a pullback, the BSE seems more vulnerable than other indices, especially U.S. indices.