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With Oil and Gold Down, India Is Looking Up

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You would think that lower oil and gold prices would boost US stocks, but they haven't really. In India, it's a different story.

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While America was absorbed by the Boston Marathon bombing and its aftermath over the past 10 days, the world financial landscape experienced a significant shift. Weaker economic signals from China continued to drive down the price of oil, bringing its drop since April 1 to an impressive 9%, as measured by the popular United States Oil Fund ETF (NYSEARCA:USO).

The price of gold crashed still more dramatically, by 11% since a panic started on April 12. The whole basket of world commodities has become 6% cheaper this month, as reflected by the Power Shares DB Commodity Index Tracking Fund (NYSEARCA:DBC).

You would think these developments might boost US stocks, as cheaper gas brightens consumers' spirits and speculative cash fleeing gold switches into equities. But they haven't really. The S&P 500 (INDEXSP:.INX) has bumped up and down this month and is basically even-money since April 1. One market that has taken advantage of shifting circumstances, by contrast, is India.

Yes, India. The benchmark S&P BSE India Index (INDEXBOM:SENSEX) has jumped more than 5% since the gold market cratered eight trading days ago, with good reason. India, where gifts of gold jewelry are an essential component of weddings and other celebrations, is the world's most voracious buyer of the metal. Official imports equaled 3% of gross domestic product last year, and much more is sure to have slipped in unofficially.

The only thing India imports more of than gold is oil. The driver here is geological rather than cultural. The nation of 1.2 billion has few hydrocarbons of its own. Purchases from abroad accounted for another 7% of GDP in 2012, $140 billion in raw terms. Put another way, a 14% (1/7) drop in oil prices saves the nation a full 1% of GDP, and oil has fallen by 9% just this month. China, by way of comparison, pays just 2.7% of GDP for its oil imports.

But there's more to the India story than fickle commodity prices. The country's equities were already the relative star in an otherwise dismal emerging-market firmament. The SENSEX has risen 11.5% over the past year, compared to an 8.5% drop in the Shanghai Composite Index (SHA:000001), an 11% decline in Brazil's Bovespa, and a 15% slide in Russia's RTS.

And that was during India's darkest recent hour economically. The economy had its weakest growth in a decade in the 2012-13 fiscal year which ended April 1 -- 5% compared to 9.3% in 2010-11. The Indian miracle survived 2008 only to bog down in political factionalism, red tape, and knee-jerk legislation limiting foreign investment in growth sectors like retail, aviation, and broadcasting.

Long-time prime minister Manmohan Singh began taking the country in hand again last autumn. He brought back his finance minister from the mid-2000s golden years, Palaniappan Chidambaram. The two of them managed to roll back some of the anti-investor laws. They established a fast-track panel to clear a regulatory backlog of infrastructure investments worth an estimated $130 billion. They reduced a budget deficit that had reached nearly 6% of GDP by cutting fuel subsidies. They reined in inflation to the point where the central bank was able to lower interest rates by a full percentage point over the past year.

Singh and Chidambaran seem to have luck on their side, too. Aside from the oil and gold price drops, forecasters expect a healthy monsoon season this summer, which should further tamp down food inflation and boost exports. The Prime Minister's Economic Advisory Council predicted last week that growth will rebound to 6.4% for 2013-14. Goldman Sachs concurred with this number in a research report, and predicted an acceleration to 7.2% in 2014-15.

A word of warning on India ETFs: They are not all created equal. The most popular, the $1 billion Wisdom Tree India Earnings Fund (NYSEARCA:EPI), badly lags the market with a basically flat return over the past year. Better bets recently have been the $460 million iShares S&P Nifty 50 Fund (NASDAQ:INDY) and $436 million iPath MSCI India Index ETF (NYSEARCA:INP). Both have tracked the rising market closely.

Investors looking for a more exotic instrument might take a chance on the EG Shares India Infrastructure ETF (NYSEARCA:INXX). The market cap is miniscule, $68 million, and it has actually lost 3.6% over the past year. But if Singh's bureaucracy-busting goes according to plan, infrastructure could lead the way in India's next growth spurt.

In any case, a dedicated India fund may be a smarter bet than just shifting into a general emerging markets instrument and hoping for better results.
No positions in stocks mentioned.

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