“I think I’ll invest in India,” said a friend recently. “The country is booming, the stock market seems like it’s just going up and up,” he said excitedly. But in my opinion, his excitement comes a bit too late.

I told my friend nearly two years ago to invest in Indian stocks. Back then, he told me I was crazy to suggest such “risky” investments. Today, with all the media hype about India, my friend is finally buying into the story.

An intelligent investor, on the other hand, will SELL a stock when the frenzy starts. When every newspaper and magazine out there starts writing about a story, when every friend or relative you have starts getting excited about an investment idea, you know it’s time to sell.

That’s exactly what I did…

In December 2005, I recommended four Indian stocks to my Agora Financial Special Report Series subscribers. Since then, our Indian stocks have had a fabulous run-up. Here are the gains:

*Tata Motors (TTM:NYSE): 47.75%

*Dr. Reddy’s Laboratories Ltd. (RDY:NYSE): 39.15% 

*Morgan Stanley India Investment Fund (IIF:NYSE): 17.73%

*HDFC Bank Ltd. (HDB:NYSE): 3.08%.

That’s an average gain of 30% in just three months. Add your dividend yields from these stocks, and you have a pretty hefty profit! The S&P, on the other hand, managed to gain a paltry 1.7% during the same time period.

Now, why did I sell our Indian stocks and take these profits off the table? Why did I sell India when the latest Newsweek carried a special story on the country and when President Bush is visiting India?

The BSE Sensex, India’s major stock index, gained nearly 32% in the last four months alone. Since 2001, the Sensex has gained about 165%. That scares me. I’ve seen billions of dollars of foreign money rush out of the Indian markets at the slightest exogenous shock.

In May 2004, elections were held and India’s government changed. The new government was a communist coalition. In reaction to these political developments, paranoid investors pulled out of the market, causing it to fall over 20% in a single day. That was the largest sell-off in the stock market’s 130-year history. The stock exchange had to be closed and trading halted to prevent further damage.

If such a steep correction happens again, I won’t be surprised one bit. In fact, I will be so excited by the panic and pandemonium that I will issue a buy alert to my subscribers to jump back into the Indian markets.

Until then, I’m sitting tight on the sidelines. Don’t get me wrong, I’m VERY bullish on the long-term India story. I don’t doubt that India is an economic powerhouse. But now is simply not the time to buy Indian stocks.

If you absolutely must play India, here is a way for you to gain from any potential correction in the market. Make a list of all Indian ADRs trading in America. Then see which stocks have the highest P/E ratios. Pick the one that has the poorest earnings. My screen shows tech stock Rediff.com (REDF:NASDAQ) as a potential candidate. You could go short on this stock — in other words, bet that it will fall.

But if you are willing to wait and watch, you might get an opportunity like May 2004 to be long the Indian market again.

Bottom line: If you’re invested in India right now, tread carefully.

Regards,

Sala Kannan
March 3, 2006

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