If one is to identify the biggest risk in the markets today, it’s the risk from the euro zone, right? For much of the year and certainly in the last few months, there has been almost a daily dose of dismal news about the woes afflicting the euro zone. Much opinion about the policy measures taken to deal with the crisis in the region has been dire, with some commentators verging on the apocalyptic.
But what effect has all this had on Europe’s markets? Year-to-date (as on 23 December 2011) the MSCI Index for the European Economic and Monetary Union (EMU) was down 18.35% in local currency terms. In the last three months, it’s up 4.15%, doubtless the result of the measures taken by the European Central Bank. MSCI Greece, of course, has been massacred, falling 63% year-to-date. MSCI Italy is down 23.6%, MSCI France is down 18% and Germany is lower by 17.6% year-to-date. All this is as it should be, in view of the uncertainty in the region and given the fact that growth is going to remain depressed for a long time.
But let’s take a look at the Indian market. In rupee terms, MSCI India is down 24.87%. That is worse than MSCI Italy, despite that country being in the eye of the storm passing over Europe. In 2011, investors seem to have been more disenchanted with India than with Europe.
The returns in local currency do not really capture the impact on foreign investors. In US dollar terms, the MSCI India Index is down a huge 36.6%, far worse than MSCI EMU, which is down 20.6%. Foreign investors in India have seen the value of over one-third of their portfolios wiped out in 2011. Contrast MSCI Emerging Markets Asia, which is down a much lower 18% in US dollar terms.
The fact that Indian markets have done worse than those in the euro zone this year reflects the deep disappointment with the performance of the Indian economy. While the problems in Europe were to some extent anticipated, the sharp slowdown in India and structural issues, such as land acquisition, appear to have caught investors by surprise. The decoupling of the Indian markets has, ironically, been to the downside.
On the other hand, the market that has truly decoupled in 2011 has been the US. Amid a sea of red, the MSCI US Index is marginally up. Year-to-date, it’s up 0.5%. Europe’s problems have added to the attraction of US equities and they are up 11.8% in the last three months, as the news flow has turned slightly more positive. It is the US markets that seem to have decoupled this year.
The silver lining for the Indian market for 2012 is that, after such a dismal performance and with expectations so low—economists are now forecasting gross domestic growth at below 6.5% for FY13—we could well see a rebound if the data starts improving even marginally.
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