Buoyancy in emerging markets lifts Indian stocks too

Revival in commodity prices and improving growth have made these markets bullish

Stock markets have been powering ahead, with the benchmark Sensex gaining 28 per cent since the beginning of 2017, despite growing concern on the valuation and growth fronts.

This is partially due to the fact that global fund managers have been extremely gung-ho about the prospects of emerging markets over the last few months.

Besides India, many other emerging markets, too, have surged in the last ten months.

Emerging market indices such as Argentina’s Merval index, Korea’s Kospi and Brazil’s Ibovespa have outperformed the Sensex with gains of 45, 31 and 30 per cent, respectively, this year. Other primary indices of emerging economies such as Singapore, the Philippines and Thailand, have also delivered robust returns to investors.

“While valuations in Asia are not cheap on an absolute basis, they are still trading at attractive levels relative to the developed market,” says DBS’ CIO Insight for fourth quarter of 2017. “Barring exogenous shocks such as the escalation of tensions in the Korean peninsula and trade wars, Asian equities are likely to outperform their DM peers.”

Emerging markets that were shunned as an asset class following the crash in commodity prices in 2015, have made a comeback this year, with a revival in commodity prices and improving growth.

Mark Mobius, Executive Chairman, Templeton Emerging Markets Group, writes in his blog that the drivers for emerging-market equities in the third quarter of 2017 included, “generally encouraging economic data from China, signs of economic recovery and hopes for reform in Brazil, a strong rebound in global commodity prices based on firming demand, and emerging-market currency strength against the weaker US dollar.”

According to Bank of America Merrill Lynch’s October Fund Manager Survey, 41 per cent of global fund managers are overweight on Global Emerging Market equities. While less than 5 per cent of fund managers were bullish about this asset class in the first three months of 2017, there has been a sharp improvement in sentiment since this April, with more than 40 per cent of managers increasing their allocations to EM equity.

The tailwinds

Towards the beginning of this calendar, there were worries that there could be a risk-off trade as the US Fed hiked rates aggressively. It was feared that there could be massive outflows from EMs. But the staggered manner in which the Fed intends to revert to monetary policy normalisation has assuaged these fears.

“The economic fundamentals of these regions have improved since the days of “Taper Tantrum”; they are now better equipped to withstand monetary shocks emanating from developed economies,” says the DBS note.

Since interest rates across countries remain very low, the ‘hunt for higher yield’ is pushing global investors towards asset classes such as EM equity, which promise a better yield.

“Overall, we believe the investment case for emerging markets continues to centre around demographics, a rising middle class and domestic consumption,” notes Mobius.

Placid global growth and improving risk appetite have resulted in the dollar weakening this year, which has benefited EM currencies. While the rupee has gained 6 per cent against the dollar so far this year, other EM currencies such as South Korea’s won, the Singaporean dollar and Thai baht have also recorded strong gains.

Foreign portfolio flows

Currency weakness has spurred foreign portfolio flows into EMs. According to Bloomberg, the Chinese equity market received the maximum flows this calendar at $33.8 billion. Russian and South Korean equity markets, too, received sizeable flows.

While global fund managers are aware of the challenges in India, they continue to believe in the country’s long-term prospects. “India’s economic growth remains strong in a global context, despite a slight deceleration in the second quarter of 2017. Consumer demand has been a key growth driver over the past few quarters and demand arising from the festival season in October could further support growth in the latter part of 2017,” writes Mobius.

Published on October 22, 2017

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