One of the assumptions in the market has been that since the economies of countries such as India and China will perform very well compared with the sluggish growth expected in most other economies, their markets, too, should do better.
Unfortunately, the performance of the Bombay Stock Exchange’s Sensex after its initial euphoria on the election of the new government doesn’t seem to bear out that belief. Compared with the closing value of the Sensex as on 18 May, the benchmark index has gained 14.5%. Over the same period, the Dow Jones Industrial Average (DJIA) has gained 18.4%, the FTSE 16.6%, the German DAX index 15.2%. The Sensex has, however, comfortably outperformed the Shanghai Composite index, which is supposed to represent the other big growth story. The Shanghai Composite has gained 12.7% over the period, losing out to depression-struck Japan’s Nikkei 225 index, which has gained 12.9%.
Moreover, with the dollar strengthening against most other currencies, the returns from investing in the US would be even higher for US investors. So far as India and China are concerned, a combination of high valuations, new issues and the beginning of monetary and fiscal tightening has outweighed the growth story. What’s more, this has happened in spite of the International Monetary Fund revising its outlook for Indian growth upwards very substantially.
Of course, a very different picture would emerge if we took the closing values for the Sensex as on 15 May, before the election results were declared. On the other hand, if you choose a more recent date, say end-September, then the Sensex has given negative returns while returns from both the DJIA and the FTSE are in positive territory. But it just shows that “money flowing into India because it’s a growth story” is far too simplistic a theory.
As Vetri Subramaniam, head of equity funds at Religare Mutual Fund, underlines, valuations matter and much of the improvement in growth had been discounted on 18 May, when euphoria swept the markets.
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