India benchmark equity indices, the BSE Sensex and the NSE Nifty are just off a couple of percentage points off record high closes seen in November 2010. The Sensex and the Nifty have had a good run over the last one year with gains of 25% each. The Indian equity indices returns are comparable with one year returns of over 22% from US Dow, S&P 500 and Nasdaq, 32% from German Dax, 22% from Hong Kong Hanseng and 25% from UK FTSE. Japan’s Nikkei has given 72% returns over the last one year on the back of a 30% fall in the value of the Yen. The Dow, S&P 500 and the Dax are all at record highs.
Markets are favouring India right now and whether the country deserves it or not, India is the most favoured markets amongst the BRIC countries. Brazil Bovespa and China Shanghai Composite are in negative territory over the last one year and are 24% and 62% away from record highs seen in May 2008 and October 2007 respectively. The Russian equity index the MICEX, is up 8.1% over the year but 29% off record highs seen in December 2007.
Table 1. BRIC Equity Index Performance
What has India done to deserve the rating of the best BRIC country in terms of equity market performance? The rise in Sensex and Nifty is not to be ignored especially given the poor performance of India’s peers and given the strong performance of developed economy indices. Global investors have been positive on India, pumping in USD 24 billion in Indian equities in fiscal year 2012-13 leading to the strong showing of the markets. Are global investors front running an improvement in India’s economy?
India’s macro numbers have been a mixed bag with inflation down to three and half year lows while GDP growth at forecasted 5.7% (RBI estimates) is well below trend levels of 8% and above. Current account deficit is at record highs and fiscal deficit is struggling to come down. India’s political scenario is fluid with mid term polls on cards or in the event of normal scheduled elections, there is uncertainty of what alliance could emerge and whether the alliance will be economy friendly.
Why is India performing better than Brazil, Russia and China despite economic and political issues? In a relative sense India’s problems seem better off than problems faced by the other BRIC nations. Brazil is a commodity driven country where growth was low at 0.9% in 2012. Growth is expected at around 3% to 4% in 2013 but markets are not impressed.
Russia is driven by oil prices, as its economy is largely dependent on oil exports. Outlook for oil prices is negative given the fact that the US is reducing imports drastically. China is struggling with over investments, bad loans and high property prices.
Indian equities have done well despite the INR trading just off 5% from record lows against the USD. The currency has seen flat movement over the last one year. The Brazilian real and the Russian Rouble have also not moved over the last one year while the Chinese Renminbi has gained over 2%. Markets have not favoured the INR despite the strong performance of equity indices.
India has done well but will it last?
India should be happy about its outperformance over its peers at least in equity market terms. However the question is will this outperformance continue or will India stumble? India can continue to outperform if commodity prices stay weak and indications are the commodity prices will stay weak due to strength in the USD (USD index is up 4% over the year), US becoming self sufficient in oil and global economy showing sluggish growth trends. However the country cannot be complacent as effects of high property prices that have defied logic and have risen to record highs despite a weak economy, corruption scams, political issues and reform uncertainty can pull down the economy.