Year-to-date, the BSE-500 index on the Bombay Stock Exchange (BSE) is slightly below the S&P 500. Calculated from the closing prices of December 2009, the BSE-500 was up 11.15% at the close of business on 10 December 2010, while the S&P 500 was up 11.24%.
Also See | Tepid returns from Indian markets (Graphic)
The frontline stocks, however, have done better, with the Sensex outperforming the Dow Jones Industrial Average. While the Sensex is up 11.7% this year, the Dow’s gain has been 9.42%. The Chinese market’s performance has been truly dismal, with the Shanghai Composite index down 13.3% year-to-date. Even the Nikkei, down 3.2% this year, has done better. Contrast this with Germany’s DAX, up 17.6% in 2010 despite all the problems in Europe.
But the reason for the comparatively tepid performance of the Indian markets this year is simple—they haven’t done very well in 2010 because they performed spectacularly last year. In fact, the BSE-500 is up 109% from the closing price of December 2008, while the S&P 500 is up 37%. That more or less reflects the difference in economic growth between India and the US. That is also the reason why the MSCI Bric index has done much worse than the MSCI US index this year.
Yet it could be argued that emerging markets fell more than the mature ones and it may not make sense to compare the bounce off their lows. The problem is we will get different results depending on the date we start measuring. Perhaps a better way to look at performance is to compare dollar returns from the MSCI indices over a period long enough to even out the ups and downs of business cycles.
The annualized historical return for MSCI India over the last 10 years has been 15.85%, compared with 12.34% for MSCI Emerging Markets, minus 0.96% for MSCI US and 0.09% for the MSCI World index. That, in short, is the rationale for investing in the Indian market.
Because markets run up rapidly in anticipation of a robust recovery, the second year of the recovery usually gives comparatively lower returns. In 2004, for instance, after the big rally in the markets in 2003, the Sensex moved up just 13.1%.
Citigroup points out why: “The reason is simple. In year one, investors pay up in anticipation of an economic recovery. In year two, they seek confirmation of the recovery, and multiples contract in the meantime. By year three, investors are convinced of the recovery and hence multiples expand again.”
By that logic, after the consolidation in 2010, next year should be better for the Indian markets.
Graphic by Yogesh Kumar/Mint
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