Why Indian markets are lagging behind emerging market peers
The Indian markets may be reaching new highs every other day, but it has been underperforming the MSCI Emerging Market index in recent months. The MSCI India index has increased 10% in the past six months, which is considerably lower than the 16.5% return on the MSCI Emerging Markets (EM) index.
Analysts at Kotak Institutional Equities say India’s weaker macroeconomic position and higher inflation are to blame for the underperformance. “India’s weaker macroeconomic position in the form of higher CAD (2% in FY2018E versus 0.7% in FY2017), higher GFD (around 6.5% of GDP in FY2018E versus expectations of 6% earlier) and higher inflation (likely to reach 4% in the next 2-3 months) reduces its appeal to investors”, they wrote in a note to clients. CAD is current account deficit, GFD is gross fiscal deficit and GDP is gross domestic product.
This is not only reflected in India’s underperformance, but also its relatively low weight in EM portfolios, and the heavy bout of selling by foreign portfolio investors. Recent news flow hasn’t been very encouraging—apart from the lower-than-expected GDP numbers for the June quarter, even earnings announcements by companies have disappointed.
Of course, another way to look at this is that other markets are outperforming India because of favourable circumstances. Vinod Karki, vice-president, strategy, ICICI Securities, says: “It’s worth noting that commodity prices have been rising, and this puts other emerging markets such as Brazil, China, Russia and Indonesia in a sweet spot as they are largely commodity exporters; India, on the other hand, largely is a net importer of commodities.”
Dhananjay Sinha, head of research, Emkay Global Financial Services, says, “China looks cheaper in terms of valuations, and this can result in certain amount of reallocation across the world,” and adds that valuations are a worry as far as the Indian market is concerned.
Kotak’s analysts add India is missing from some global supply chains such as low-cost labour-intensive manufacturing and high-tech electronic chain, which makes it less attractive versus certain other emerging markets in the context of the global economic recovery theme for global investors.
To be sure, despite the underperformance of MSCI India index against the MSCI EM index, the Indian market continues to be relatively pricey. According to Bloomberg, MSCI India index trades at a one-year forward ratio of 17.94 times against 12.77 times for the MSCI EM index. As such, the recent performance can also be seen as an adjustment for past exuberance.