Will India and China continue to trail developed markets?
India and China are seeing domestic economic issues taking its toll on its markets. The Nifty and Shanghai composite are down 4% and 8% for the month of March 2012 respectively. On a one year basis Nifty is down 10% while Shanghai Composite is down 24%. The performance of Indian and Chinese equity markets trails Japanese, European and American equity markets in March and by a wide margin on one year basis (Table 1). Domestic issues are hurting both the markets and unless there are signs of the issues being resolved, it will be difficult for Indian and Chinese markets to outperform their peers in developed markets.
Indian markets have struggled through fiscal 2011-12. Equity, currency and bonds have given negative returns. The sharp underperformance of Indian markets as compared to other global markets gives a sense of optimism that the worst may be over. However domestic issues of inflation, interest rates, government finances and current account deficit are very much out there and are not showing signs of easing off. The one positive factor is that FII flows are positive with FII’s being net buyers of around USD 1.3 billion in March and around USD 8 billion calendar 2012 to date.
India will see continued FII flows on the back of central banks created global liquidity and its economy should feel the effects of a strong US economy. However even if Indian markets do well going forward, the markets will continue to trail US, European and Japanese markets. The union budget for 2012-13 has not done anything much to enthuse the markets while the poor numbers for 2011-12 has spooked the markets. India is starting off a new fiscal year on a difficult note with high government borrowing hitting bond yields and there continues to be uncertainty on rate cuts by the RBI. Bond yields at 8.50% on the ten year benchmark bond are going into April at calendar year 2012 highs.
Markets will watch the fourth quarter corporate results and guidance for the year and RBI policy for cues on direction.
China is trying to curb a property bubble that has threatened its banking system. China’s forecast GDP growth of 7.5% for 2012 is the lowest since 1999. Inflation is down with February inflation at 3.2% against peaks of 6.5% seen in 2011, which is the only positive factor for the economy. China has seen record trade deficit in February while there is anecdotal evidence of stress on bank’s balance sheet due to heavy lending to the real estate sector. Chinese equities have borne the brunt of the issues facing the Chinese economy and it is unlikely that China will outperform global markets in 2012.
US equities have been the best performer amongst the markets on a year on year basis. The US economy is showing signs of strength and the USD has seen positive returns over the year. A strengthening US economy will drive up the USD and help US equities to outperform. The fact that the Reuters CRB commodities index is down close to 13% over a one year period underscores the USD strength and the issues facing China, which is the largest commodity importer in the world. Commodities including Gold will continue to underperform in 2012.
European equities have managed to stay afloat on a year on year basis despite deep sovereign crisis issues and a weak Euro. European problems have not gone away with issues on Spain’s deficit surfacing but ECB intervention coupled with a confident German economy (German Business Confidence Index was positive for February) will help European equities.
Japan will see its currency weakening as the Bank of Japan keeps interest rates low and pumps in money into the system. Japanese equities will benefit from a weakening yen and the economy will benefit from the on going reconstruction work post the March 2011 earthquake.