India offers best returns among emerging markets

A firm interest rate trend in the US has triggered off a selloff across global equity markets. Since April ’05, Morgan Stanley Capital International (MSCI)- managed MSCI World Index has fallen 2.5%.

However, emerging markets led by India continued to show resilience. The MSCI Emerging Markets Index rose a modest 0.3% and the MSCI India Index looked up 3.2%, outperforming all other markets in the peer group.

The picture is relatively mixed in other key emerging markets. The MSCI Korea Index remained flat, while the MSCI Taiwan Index rose 2.5%. The two markets have a 40% weightage in the MSCI Emerging markets Index, while India’s weightage is just over 5%.

The MSCI Brazil index rose 1.7%, while the MSCI South Africa Index fell 2.5%. The outperformance in Indian equities is attributed largely to the strong $1.2bn inflows from domestic mutual funds, which is their highest investment in equities in any single year. In May ‘05, the MSCI India clocked a 9% gain in dollar terms.

The entire emerging markets pack was up only 3.4%. A low domestic investor participation is a significant concern for most of these markets. “Asia generally has a high savings rate but currently majority of such savings tend to go into relatively low-yielding bank deposits,” Hazel McNeilage, MD, Asia, Principal Asset Management told ET.

The liquidity from foreign institutional investors (FIIs) remains the key driver for equities in the region. However, the strong buying from Indian funds has allowed local equities to outperform the emerging market pack.

Domestic MFs collected around Rs 9,000 crore by selling new units in the past nine months and have invested around Rs 6,000 crore. When it comes to domestic participation, India still has a long way to go.
Market estimates put domestic savings allocation to equities in India at 0.2% in ’04 against 2.4% 10 years ago.

Hedge funds, which have an exposure of over $2.5bn in Indian equities, have pulled out over $300m.

Sources say the net FII outflow of $350m in April and May from Indian equities is largely on the back of the selloff from hedge funds, investing through participatory notes. A string of new India-specific hedge funds are raising new money. The money that moved out of India was more from global and regional mutli-strategy funds, sources say.

Fund managers say that Indian equities are relatively expensive at current levels, trading at 11.2 times their expected earnings in fiscal ’05-06. The whole emerging markets trade at just over 10 times their earnings.

Yet, investors see a strong resilience in Indian equities, because the broader macro-economic picture of the country is more attractive than any other market in the region.

“The India growth story continues to keep investors interested despite a slowdown in the earnings growth momentum,” a fund manager at a leading US-based fund said. Average earnings in top Indian companies are expected to hover around 20% against an over 30% growth rate over the next two years, according to analysts. Credit Lyonnais Securities estimates the compounded annual growth rate for earnings in India over the next two years at 12.3%, against Korea’s 5.6% and Taiwan’s 2.7%.