Which markets have performed the best during the financial crisis

Given its unenviable position as the origin and the centre of the financial crisis that has plagued the world for almost five years now, one would have expected the US stock market to do very badly, right? But that is far from being the case. As the chart shows, between the end of 2007 and 27 March 2012, the US market has comfortably outperformed the Indian market. As on 27 March 2012, US market capitalization was lower by a mere 4.2%, compared with its level at the end of December 2012, according to data from Bloomberg. That’s despite home prices continuing to fall, policy rates at rock bottom, unemployment still very high and the fiscal deficit shooting through the roof.

Not all emerging economies have done badly. The Indonesian markets have done very well indeed. Between 31 December 2007 and 27 March 2012, the market capitalization of the Indonesian market more than doubled, going up by 102.6%. Investors seem to have discovered Indonesia in the last few years. Brazil too did comparatively well, increasing its market capitalization by 15.7%, perhaps because of its dependence on commodities.

What about the euro zone, where growth is widely expected to be very low, where policy making is sluggish and pulls in different directions and where the sovereign debt problems have merely been brushed under the carpet? Well, Germany’s market capitalization between 31 December 2007 and 27 March 2012, in US dollars, fell by 32%. Bad, but not as bad as India. And in the UK, where they had to nationalize large chunks of their financial system and which is reeling under an austerity programme, market capitalization shrank by 17.7% over the period.

Also See | Performance Metre (PDF)

How have the economies performed between 2007 and 2012? Taking the gross domestic product (GDP) at current prices and in US dollars for 2007 and estimates for 2012 from Bloomberg data, we find that US GDP has increased by 10.5% between 2007 and 2012. India’s GDP at current prices and in US dollars over the same period went up by 74.6%. China’s GDP over the period increased by 121.6%. But these improvements in the Indian and Chinese economies don’t seem to have impressed investors. On the other hand, they have been very appreciative of the growth in Indonesia’s GDP, at current prices and in US dollars, of 116.7% over the period and Brazil’s GDP growth of 89.9% between 2007 and 2012. Economic growth has had little to do with market performance.

What explains this data? One reason why the Indian market performance looks so dismal is of course the depreciation of the rupee. In rupee terms, India’s market capitalization has fallen by a more reasonable 14.2% between 31 December 2007 and 27 March 2011, according to Bloomberg data. But that still doesn’t alter the fact that the US market has done better. The flood of liquidity seems to have benefited the US the most, which was in any case one objective of US monetary policy. And the strength of the US dollar is also the result of money flowing to the US.

But the main reason why the US has been the main beneficiary is because the past five years have been periods of high risk. Gaurav Dua, head of research at Sharekhan, puts it succinctly: “If you were a fund manager in the US in these uncertain times, you would first and foremost be concerned about the safety of your funds. That’s why you would prefer to invest in the US.” Could the recovery in the US in the last few months have had something to do with the outperformance of its markets? If we take the period between end-2007 and end-2011, US market capitalization was down 15%, but then Indian market capitalization, in US dollar terms, fell by 45% over the period. In other words, the US market outperformed even before the recent spurt.

The US continues to be the safe haven, never mind the fact that the financial crisis originated there. That is also seen from the fact that whenever risk spikes up, the US dollar strengthens and US treasury yields dip.

There is, however, another factor—valuations in India and China were very high at the end of 2007. Now that growth in these countries is slowing down, those valuations are seen to be excessive.

When will the tide turn? Recall how, during the good times between 2003 and 2007, emerging markets soared, while the US markets complained of a lost decade. Probably therefore the tide will turn when uncertainty is lower and there’s a sustainable recovery in the US and in Europe. That should reassure investors enough to start expanding their horizons once again.

Manas Chakravarty looks at trends and issues in the financial markets. Comment at capitalaccount@livemint.com

Graphic by Yogesh Kumar/Mint

Also Read | Manas Chakravarty’s earlier articles