Equity markets in the US and Europe have outperformed emerging market equities including Indian equities by a wide margin year on year. The outperformance of developed markets suggest that emerging markets have a lot of work to do on their economies to push through sustainable growth without creating inflationary pressures. Will the next one year see emerging market equities gain over the developed market equities? Time will tell but one should keep a focus on what emerging economies are doing to get their act right.
The Indian benchmark indices the Nifty and the Sensex have risen 7.17% and 6.66% month on month respectively in October 2013 to touch record highs. The Sensex crossed the 21,100 mark and the Nifty crossed the 6250 mark in the last one month to deliver returns of 13% and 10% year on year. The market has moved higher despite the fact that inflation in the economy remains high along with lower than average GDP growth rate. The Indian markets have seen an inflow of funds from FIIs due to the postponement of the decision of withdrawal of stimulus in the US economy. The Federal Reserve is expected to keep the stimulus in the economy as long as the recovery in growth and decline in Unemployment rate does not become a prominent trend. The Fed’s decision is likely to stimulate inflow of funds in emerging markets unless the developed world shows strong signs of sustained economic growth.
The European markets have delivered decent returns with a recovery in the European Union gathering pace. The German DAX and the UK FTSE have given a return of 4% in the last month and have given a return of 25% and 17% respectively in the last one year.
The US benchmark indices have had a decent run in the last one year with the Dow Jones Industrial Average, the NASDAQ and the S&P 500 delivering returns of 19%, 32% and 25% respectively. The US benchmark indices posted modest gains in the last one month on account of the partial shutdown of the US Government that ended almost a month later but gave a signal to help continue the stimulus for the economy amidst weakening growth. The US economy has shown improvement in economic data with lowering of Unemployment rate to 7.2% and recovery in the GDP growth to 2.5% levels as a result of the stimulus given to the economy. The Fed had almost decided to partially withdraw this stimulus citing decent recovery in the economy but held its decision and continued with buying USD 85 billion of assets every month to sustain the growth and lower the Unemployment rate.
The Asian benchmark indices of Hang Seng, Shanghai Composite and KOSPI have delivered modest gains of 8%, 4% and 8% respectively but the Nikkei has given a spectacular return of 61.79% in the last one year. The Asian benchmark indices including Japan have remained marginally flat to positive in the last month. There are signs of sharp recovery in the Chinese economy as the economic data indicates. The GDP growth registered a growth of 7.8% in the second quarter of the year 2013 compared to 7.5% growth in the first quarter of 2013.
The major currencies have depreciated against the USD on a year on year basis but last one month has seen strong appreciation in the value of emerging market currencies on account of inflow of funds. Strong outflows were witnessed in the emerging markets in the months before as the Federal Reserve had indicated withdrawal of stimulus for the US economy citing positive triggers in the economic data.
Crude Oil has remained flat on a year on year basis and on a month on month basis while Gold declined 22% in the last one year and remained flat on a year on year basis. The rise in equity indices is expected to keep the gains subdued for the yellow metal in the near future while sustained rise in US shale oil production will keep crude prices in check.