Mumbai: India, buoyed by a decline in commodity prices and a government encouraging international investment, is claiming its place as the stock market with the least volatility and the highest return among the four prominent emerging economies that include Brazil, China and Russia.
The BSE Sensex, the benchmark for India’s $1.2 billion equity market, rose 1.9% in the 12 months ended 27 May when adjusted for price swings, the best gain in the group of emerging-market countries known as the BRICs, according to the Bloomberg Riskless Return Ranking. India’s stock volatility is the least among its peers, and has the highest risk-adjusted returns even over five years.
The 30-stock Sensex climbed to more than a two-year high on 17 May, as tumbling prices of oil and gold help cut the import costs of a nation that buys more than 80% of its crude from abroad and is the world’s top bullion buyer. Foreigners have plowed a net $14.6 billion into local shares this year, a record for the period, as the decline in commodity costs and the most aggressive monetary easing since 2009 has outweighed concerns about political gridlock that threaten the government’s growth agenda. Brazil is the worst-performing equity market this year in the BRIC group as a slowdown in China, the nation’s largest trading partner, dimmed the outlook for commodity exporters.
“India, being a net importer of commodities, has gained from the softening in prices,” Nirakar Pradhan, who manages $590 million as chief investment officer at Future Generali Life Insurance in Mumbai, said in a phone interview on 23 May. “Brazil and Russia, being commodity exporters, depend on the external environment, unlike India.”
Declines in oil and gold may help cut India’s import costs by almost $7 billion in the 12 months to March 2014, Barclays Plc said in a 17 April note. Overseas purchases of the two items added to a record $32.6 billion current-account deficit in the last quarter of 2012, government data show.
Commodities, which accounted for more than 80% of Russia’s export revenue in 2011, are down 2.7% this year, according to the Standard and Poor’s GSCI index of 24 raw materials. The gauge sank 2.3% on 15 April after China, the world’s largest consumer of everything from copper to zinc and iron ore, reported growth unexpectedly slowed to 7.7% in the first quarter. The Asian nation’s economy grew 7.8% in 2012, the slowest pace in 13 years.
The Ibovespa, Brazil’s main equity gauge, has declined 7.5% this year. Russia’s Micex Index has fallen 5.3% in the period as the recession in the euro area, which accounts for about half of Russian trade, hurt demand for energy exports.
Adjusted for price swings, Ibovespa returned 0.17% in the past 12 months, the Micex rose 0.7% and China’s Shanghai Composite Index gained 0.05%. The risk-adjusted return, which isn’t annualized, is determined by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The Reserve Bank of India cut interest rates for a third meeting on 3 May, extending the only reduction in funding costs among the BRIC economies this year. Governor D. Subbarao said in Frankfurt on 14 May that the latest data showing inflation at a 41-month low will be factored into policy decisions due in June. Growth in India’s economy will improve to 5.7% in the year through March 2014, the RBI forecasted this month, from an official estimate of 5% for the previous period.
Volatility in Indian stocks is the lowest among the BRIC countries because the Sensex isn’t skewed toward any particular industry, said Mahesh Patil, co-chief investment officer with Mumbai-based Birla Sun Life Asset Management Co., which manages $13.8 billion in assets. Raw-material producers in Brazil make up about 42% of Ibovespa’s weighting, data compiled by Bloomberg show.
Financial companies, which make up about 26% of the Sensex, were the biggest contributors to the measure’s returns over the past year. Together, the group, which includes lenders such as ICICI Bank Ltd and HDFC Bank Ltd, accounted for 10.1 percentage points of the index’s total return in the 12-month period ended 27 May, the data show. Consumer stocks were the second-biggest contributors.
The biggest detractor from the Sensex’s returns was the materials industry, led by companies such as Jindal Steel and Power Ltd and Tata Steel Ltd, which cut the performance by 0.8 percentage points over the past 12 months.
Sun Pharmaceutical Industries Ltd, India’s top drugmaker by value, had the best risk-adjusted returns in the Sensex in the period. The Mumbai-based company, which has a 2.4% weighting in the gauge, combined the highest absolute return of 76% in the past year with the sixth-lowest volatility, the data show. ITC Ltd, the tobacco maker that has the biggest weight in the Sensex, had the third-best return when adjusted for volatility. The shares surged 47% with below-average volatility.
Hindustan Unilever Ltd, India’s biggest home-products company, surged 46% in the past 12 months, with the eighth-highest risk-adjusted return. Parent Unilever Plc said on 30 April it plans to spend as much as $5.4 billion on lifting its stake in its local unit, wagering the spending power of 1.2 billion people will revive.
Companies in the Sensex are less indebted than their peers in Brazil and China, the data show, making them better equipped to weather an economic downturn. The Sensex’s debt-to-equity ratio is 96%, compared with Ibovespa’s 126.5% and the Shanghai Composite Index’s 160%, the data show. The Indian measure’s projected 12-month return on equity at 24.5% exceeds Russia’s 15.8%, China’s 15.5% and Brazil’s 14.6%, the data show.
“Indian companies are more conservative than others in the BRIC group and Indian banks don’t lend much for a project as they too are conservative,” said U.R. Bhat, managing director of Dalton Capital Advisors India Pvt. Ltd, a unit of London-based Dalton Strategic Partnership LLP that manages about $2 billion in assets globally. “That’s why the Sensex’s return on equity is higher than the competing markets. That’s why foreigners are backing India in preference to many others.”
Raw materials are returning to a normal state from a super cycle for prices that saw abnormal strength in returns, Goldman Sachs Group analysts led by Jeffrey Currie said in a 14 May report. Returns for commodities as gauged by the S&P GSCI Enhanced Index will be 1.6% over 12 months, the note said. That compares with a 23 April forecast of a 2.5% return.
The MSCI BRIC Index of shares in Brazil, Russia, India and China has slid 2.5% this year, trailing the 11.7% increase in the MSCI All-Country World Index.
“India has taken steps that make it the most promising of the BRIC nations in terms of long-term stock gains,: Goldman Sachs Asset Management Chairman Jim O’Neill, said in December.
Overseas funds bought $24.5 billion of stock in 2012, the most among 10 Asian markets tracked by Bloomberg, after Prime Minister Manmohan Singh removed barriers on foreign investment in the retail and aviation and lowered fuel subsidies to avert a credit-ratings downgrade. The inflows helped the Sensex jump 26 percent last year, its best annual gain since 2009.
Political risk still clouds India’s prospects ahead of elections due by May next year. Opposition protests over graft scandals have disrupted parliament. Bills to simplify taxes and open up the pensions and insurance industries to companies abroad are among those that are stalled.
“If we put our house in order, if do something to address the infrastructure bottlenecks, the potential for inflows and higher returns is very high,” Dalton’s Bhat said. “The pitch for foreigners is: the government will get its act together.”