Bearish On Oil? Buy India
As markets absorb new price realities, more bankruptcies, suspended capex and other market-disrupting events are likely. For global tactical ETF asset allocators, a secular energy industry “underweight” should be in place.
Less obvious is to overweight the energy-importing economies of Asia. Weaker oil prices will have an immediate impact on domestic growth and trade balances. But more importantly, price declines will lead to sustained disinflationary pressures, and hence, a fall in short- and long-term interest rates. Lower rates are almost always supportive of asset prices.
This is already happening. While recent broad emerging market performance has been soft, regional and country performance dispersion is at its widest level in a decade. The MSCI Emerging Asia index outperformed MSCI Emerging ex-Asia by roughly 20 percent last year (in U.S. dollars).
India is particularly well placed to benefit here. Consumers in the developing world receive the greatest income boost from lower oil prices, as the less affluent have a higher propensity to consume. Admittedly, India’s consumer purchasing power boost may not be as large, given the government’s recent increase on petrol taxes. However, that is substantially offset through other channels; namely, in the form of higher government revenues and, hence, fewer cuts in spending.
More importantly, the Reserve Bank of India (led by the very credible Rajan Raghuram) has spent the last few years taming inflation and resisting calls for an easier monetary stance. With inflation now declining, the central bank can return to a focus on boosting growth with maximum policy flexibility.
This, too, has already begun. In an unscheduled decision on Jan. 15, the central bank cut its main policy rates by 25 basis points each—very likely marking the start of a loosening cycle. The positive impact on the domestic stock market should not be underestimated.
From Zero to One
Thiel’s primary argument is that building a better future is not about competition but differentiation. Differentiation creates value as clients benefit from new technologies or ideas. This is how to go from “zero to one” and is the path blazed by ETF strategists, many of whom have developed a “global tactical” specialty in an uninhabited stretch of market space. The ultimate result is differentiated client portfolios that can thrive and withstand the shocks of a globalized, modern world.
At the time this article was written, the author held a long position in INDA, along with his firm's clients.
Tyler Mordy, president and co-chief investment officer of Hahn Investment Stewards, is an expert in the design and application of global macro ETF managed portfolios. He is interviewed by the financial media for his global investment strategy views, as well as ETF trends. CNBC has called him one of the “best independent ETF experts.” Contact Hahn athahninvest.com/contact.