It is the best of times, it is the worst of times. On one hand, the Indian stock market is doing very well. The CMIE Cospi (2540 companies) is at a market capitalisation of Rs.24.7 trillion or roughly $550 billion. What is more, the Cospi P/E is up at 18.
At the same time, the world economy is plagued by important doubts - particularly about the US and the Chinese economies. Business Standard had an excellent editorial, a few days ago, exploring these themes.
What is doubly odd is that while many economists are truly worried about these `global macroeconomic imbalances' (e.g. Ken Rogoff, Martin Feldstein), the financial markets seem to be completely comfortable with what is going on! I use the implied volatility on the S&P 500 as a measure of expectations about future equity volatility. It is down to remarkably low levels like 11%. I can't help thinking it's a good idea to be long volatility.
What is someone invested in India to do? I think that India's exposure to a global business cycle downturn is greater than meets the eye. A lot of the Nifty stocks will take a beating if things go wrong between China and the US. Some Indian companies (e.g. Infosys) will suffer because they export a lot. Others (e.g. Tata Steel) will suffer because distressed Chinese companies will crash product prices.
And given how low the VIX is, it seems like a great idea to buy protection against the global business cycle by: Purchasing out-of-the-money put options on the S&P 500!
There is the small matter of RBI's capital controls, which prevent you or I from doing so. As Jayanth Varma says, the Indian capital account is open to all except the Honest Resident Indian (HRI). Can one use the limit of $20,000 per person per year of outbond capital in order to buy protection using the S&P 500 puts? Has anyone used this limit to do global diversification?