The Global Bull Goes Bottom Fishing in India — Following in Alpha Trader George Soros’ Footsteps

Financial markets have their seasons. And experienced traders know that changes in seasons always offer new opportunities. That highlights one of the paradoxes of trading: On the one hand, Alpha traders know that one of the many first rules of trading is “don’t catch a falling knife” — that is, never buy into a falling market. On the other hand, the greatest fortunes are made on anticipating turns in the markets. This week’s Global Bull Market Alert pick — the WisdomTree India Earnings ETF (EPI) — follows in the footsteps of an Alpha trader who has done just that.

While most funds have been dumping stocks in India’s sliding market, Alpha investor and billionaire global investor George Soros has turned contrarian on India. According to the Times of India, the Hungarian born Soros — who since last August is again actively managing his famed Quantum fund — recently went on a buying spree in India making investments valued at $140 million in a wide range of Indian companies.

In many ways, Soros’ call is a vintage contrarian bet. India has been one of the worst performers in the global markets this year. Institutional investors have pulled out more than $7 billion from Indian equities as the BSE Sensex crashed 7,400 points, or 35%, from its peak of 20,873 back on Jan. 8 amid concerns over a weak global markets, soaring global oil prices and spiraling inflation in India. 

Brokerages and investment banks are uniformly gloomy about India. Inflation has accelerated to just under 12%, a 13-year high. Industrial output in May 2008 rose 3.8%, the slowest in six years. Manufacturing growth slowed to 3.9% in May, while capital goods output growth slowed to 2.5% vs. a robust 22.4% last year. The front page of Friday’s edition of London’s Financial Times showed retail investors in neighboring Pakistan ransacking a local broker and demanding that the Karachi Stock Exchange be closed down to limit their losses. Goldman Sachs’ short-term target for India’s Sensex index — which closed overnight at 13,850 — is 12,600 and the end-December target is 10,000. And according to Lipper Analytics, three India-focused funds rank among the 10 worst-performing funds globally in May. Stories about India’s much vaunted middle class and the country’s outsourcing prowess have evaporated from the global financial press virtually overnight.

Yet, Soros realizes that the fundamentals of India have not deteriorated to the extent the drop in its stock market suggests. Indian banks, for example, have had almost no exposure to the U.S. sub-prime markets and continue to grow their earnings at 30%+ year. Last week, the Indian market rallied over 10%, showing the first sign of positive momentum in months.

All Alpha traders know that the best time to buy is when there is blood in the streets. And apparently, George Soros — who called the current crisis the worst the world has seen since the Great Depression — has seen enough blood in India to get back into the market. The best way to join George Soros is by buying the WisdomTree India Earnings ETF (EPI), which provides a broad exposure to the Indian stock market. Its top holdings in India include the country’s biggest companies such as Reliance Industries, Oil and Natural Gas Corporation, Infuses, Bharti Airtel, and ICICI Bank. More than ever, you need to protect your downside, so make sure you place your stop at $16.30. And if you are feeling particularly queasy, you may want to consider taking half of your position size, and adding to your position as it moves in your favor. For even bigger potential upside, buy the October $16 call options (EPIJP.X).

On Friday, we were stopped out of Mechel (MTL) for a loss. We also sold the remaining half of our MTL options last week.

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