Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Opinion / Online-views/  Emerging markets give investors cold comfort
BackBack

Emerging markets give investors cold comfort

Emerging markets give investors cold comfort

Premium


The familiar stench of panic is in the air once again. Equities are plunging, currencies are plummeting and screaming headlines announce that the Dow Jones Industrial Average is back to levels last seen at least a decade ago—in January 1997. Japanese stocks fell to a 26-year low on Tuesday.

But there’s a big difference between markets this time. Unlike the Dow, the UK’s FTSE and the French and German bourses, emerging markets are still above the depths they plumbed in October and November.

Also Read Manas Chakravarty’s earlier columns

The bigger fall in emerging markets at that time had been put down to their dependence on foreign funds, or that they were prone to sharp advances and retreats. Some even pointed to the allegedly robust health of the US corporate sector as a reason for funds flowing back there. But those reasons have fallen by the wayside and emerging markets have been performing relatively well this year.

Now, consider the Bombay Stock Exchange’s Sensex index, which, at around 8,000, is at a level it first crossed in September 2005. The market in India is still above the highs it scaled during the dot-com boom. That might be no consolation to those who invested at the top of the market in 2007, but it does show that in spite of the carnage last year, the Indian market has proved relatively resilient compared with most others. Or consider Brazil, whose Bovespa Index first reached its present level as recently as January 2006.

Is the relative outperformance of markets such as India and Brazil a reflection of their new-found economic strength? Is it a vote of confidence in their ability to withstand the current financial tsunami better than other countries? Interestingly, economies that are dependent on trade have suffered the most during the current crash. Singapore’s Straits Times Index is currently at levels first seen 16 years ago, in January 1993. Similarly, the Hang Seng is at a level it first reached way back in 1994.

Another way of looking at market differences is to consider the returns that investors would have made by investing their money in the country’s MSCI index 10 years ago. If you had put your money 10 years ago in a fund that tracked the MSCI World Index, your annualized return would have been -4.8%. If, instead, you were impressed with the US economy’s record of innovation and decided to invest in a fund that tracked the MSCI US index, your annualized return in the last 10 years would have been -5.7%.

And if you took the view, in early 1999, that after a decade of deflation, the Japanese economy would be bound to do well over the next 10 years, you would have been sorely disappointed. The annualized return from MSCI Japan over the last 10 years has been -4.3%.

By contrast, if you were prescient enough to believe that emerging markets were investment opportunities, you would have made an annual return of 6.5%. MSCI India’s annual return for the past 10 years has been 9.6%, which probably beat inflation and be slightly higher than average returns from bank fixed deposits over the period.

Of course, these comparisons are rather unfair and very different results would be obtained by taking returns at the top of a boom. But the point is that emerging markets have done far better than developed ones over the last 10 years. That poses the question: Since the factors that made emerging markets do better continue to be present—higher economic growth, better demographics and more savings —shouldn’t emerging markets continue to outperform in the next 10 years as well?

There should be little doubt about that.

In fact, the 5.3% growth in India’s December quarter gross domestic product (GDP) looks positively rosy when compared with declines of 6.2% in the US GDP, 6% in Europe, 16% in Singapore and 20% in South Korea. The problem is that even if the Indian economy does better than in the December quarter in the days ahead, it may not help the markets. That’s because the financial system in the West, which was the source of funds to emerging markets, has collapsed. And the latest threat that could spark another bout of panic selling is from the implosion of the eastern European economies. As EPFR Global reports, outflows from Asia-ex-Japan funds hit a 17-week high during the fourth week of February.

Perhaps the recent outperformance in markets including India is linked to the fact that their economic growth will be better than that in developed countries. But while we should be thankful for small mercies, “we are less battered than the others" is hardly a statement that investors can draw comfort from.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 03 Mar 2009, 10:48 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App