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Business News/ Market / Mark-to-market/  A growing divergence between India and other emerging markets
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A growing divergence between India and other emerging markets

While the rupee has been resilient, in case there is a sharp depreciation and reforms do not gather steam, there could be some outflows from India, too

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The MSCI India index is up 1% since the beginning of the year, compared with a 10% slump for the MSCI Emerging Markets index and a 14% decline for the Thomson Reuters CRB Commodity Index, as you can see from chart 1.

The divergence is not surprising as emerging markets such as Brazil and Russia, part of the Brics economies, have been roiled by the crude slump. Economies such as Taiwan, South Korea and Thailand are hurt by the China slowdown and yuan depreciation. The year to date returns are given in chart 2.

As a result, the premium in terms of current price to earnings multiple has widened between MSCI India and MSCI Emerging Markets as you can see from chart 3, the highest in over a decade. The MSCI India index is trading at 23.6 times current price to earnings multiple, while the MSCI Emerging Markets index is trading at nearly half the valuations, at around 12.4 times.

Brent crude prices have slid to more than six-year lows, hovering below $50 per barrel. The softness in crude and commodity prices is going to affect the cash flows and economies of commodity producing countries. Jitendra Sriram, director and head of research at HSBC Securities and Capital Markets (India) Pvt. Ltd pointed out that there will be lower revenue coming to government coffers because of the sharp plunge in crude for Russia and Brazil. China is seeing an economic slowdown and an equity market sell-off. India may be attracting some money which was going to China because it is a beneficiary of the commodity slump, while the economy has also bottomed out. In the second week of August, CLSA raised its already substantial overweight position in India in the Asia Pacific ex-Japan relative-return portfolio by shaving the overweight in China by two percentage points.

Economies that rely on exports for Chinese domestic demand and those that compete with Chinese exports to other markets such as Taiwan, South Korea, Malaysia and Thailand will be most vulnerable to the slowdown in China and yuan depreciation, said Credit Suisse in a note dated 13 August. A weaker Renminbi could translate into softer imported inflation, given that imports from China account for 13% of total imports into India, according to Credit Suisse. The softening of Wholesale Price Index and retail inflation has increased expectations of a rate cut in September in India after a long pause. Another reason for India’s outperformance is the rupee’s resilience against the dollar compared with other emerging markets in the event of the US Fed raising its policy rate. The rupee has fallen over 2% in the past three months, while the Russian ruble has lost 23%, the Brazilian real slumped 14% and the South African rand declined around 8%.

Will the outperformance of India against emerging markets continue? While India clearly stands to benefit as a net commodity importer, the stress of falling commodity prices on banks where metals constitute 6% of outstanding loans cannot be ruled out. Also, while the rupee has been resilient, in case there is a sharp depreciation and reforms do not gather steam, there could be some outflows from India, too.

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Published: 16 Aug 2015, 08:53 PM IST
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