Global growth may be back on track, albeit with a large dose of uncertainty, but markets still have some way to go before they go back to their pre-crisis levels. Much has been written about a multi-speed recovery and emerging markets should be the best performing markets, since their economies have been the least affected.
The first equity market to cross its pre-crisis high has been Indonesia, as can be seen from the chart. Brazil is less than 10% from its pre-crisis top, reached during the heady days of mid-2008, when commodity prices were on a tear. The Sensex is clustered along with a number of developed markets trading at 16-25% below their peaks. The surprising outliers, though, have been the Chinese markets, with both the Hang Seng and the Shanghai Composite miles below their pre-crisis highs. This seems counter-intuitive—after all, isn’t China the fastest growing economy in the world?
Look at it another way. China’s gross domestic product (GDP), according to International Monetary Fund (IMF) estimates, will be around 31% higher, in local currency terms and at constant prices, than in 2007. Yet the Shanghai market is 53% below the peak it reached in October 2007. True, there was a frenzy in Chinese stocks before the crisis, but does it justify so large a fall, especially after strong growth since then?
Graphic: Ahmed Raza Khan/Mint
Look, in contrast, at the UK. IMF estimates that its GDP this year will be 3% lower than its GDP in 2007. Its market is 18% below its peak. The US Dow Jones Industrial Average is 23% below its October 2007 high, while its GDP this year is expected to be 1% higher than its 2007 level.
What about India? IMF estimates show that our GDP in 2010 will be around 23% higher than in 2007. Yet the Sensex is 17% lower than its January 2008 high. And finally, is there anything special about the Indonesian market, an extra something that has allowed it to go beyond its pre-crisis high? Not really—Indonesia’s GDP is expected to be about 17% higher than its 2007 level, while its market is 5% higher than its January 2008 pre-crisis peak.
True, one reason for the disconnect between the performance of the Indian and Chinese markets on the one hand and the developed markets on the other is that the former had been bid up very sharply to unsustainable levels before the crisis. All it shows is that appetite for Indian and Chinese equities is still nowhere where it was before the crisis.
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