The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage. The opinions expressed are those of the author and do not represent the views of TheStreet or its management.By Ivan Martchev, InvestorPlace NEW YORK ( InvestorPlace) -- Recently, I opined that my global investment strategy was to sell euro-denominated risk assets, such as PIIGS sovereign bonds or European financials that were caught up in the short-squeeze rally following the "successful" auction of Portuguese 10-year bonds below 7%. I had referred to Portugal being in the final stages of a bailout plan, and someone commented that there was no such bailout -- I beg to differ.
The PIIGS Are Screaming (Again)The only reason the Portuguese bond auction was "successful" was the European Central Bank (ECB), which was taking Portuguese bonds off the hands of banks that participated in this auction. That is not what I would call a "market-determined interest rate." At a rate of more than 7%, the Portuguese government will have trouble funding itself as interest on the bonds becomes cost-prohibitive. As I write this, those "successfully auctioned" bonds in January are now trading with a yield of 7.42%. Someone should speed up finalizing that bailout plan fast. Why should investors in emerging markets care about what goes on in Europe? Because we have low overall inflation in the U.S., a deflationary shock in PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) driven by austerity measures and bank losses that curb lending would mean inflationary problems in most emerging markets. The aggressive monetary policies that are targeting the problems in Europe help create inflation in the emerging world. This is why India was down so much in January -- and Indian small-caps as measured by the Market Vectors India Small-Cap ETF ( SCIF) were down even more -- as market participants assumed the BRIC market had the least stamina to withstand the developed-world-induced inflationary tsunami. We live in a global economy; what happens in the West affects the East.
Go Long Indian StocksRight now, I would be a buyer of Indian equities that have been punished by this inflationary scare such as Tata Motors ( TTM), HDFC Bank ( HDB) and ICICI Bank ( IBN). Indian stocks may go a little lower, but I know the fundamental backdrop is sound. (Read the related article on why inflation is investors' worst problem.)
Go Short European Banks