Indian equity market best performer among emerging economies this year

The benchmark index, S&P BSE Sensex, is up 11% in local currency terms and 1.4 % in dollar terms this year

The Indian equity market continue to be the best-performing among emerging economies for 2018 despite the rupee weakening to 70 against the US dollar. The benchmark index, S&P BSE Sensex, is up 11 per cent in local currency terms and 1.4 per cent in dollar terms this year. In comparison, the returns for most emerging markets (EMs) are in the negative territory.

Even in terms of foreign portfolio investor (FPI) flows into the equity markets, India has fared better than other EMs. While the offshore investors have sold $17 billion worth shares across EMs this calendar year, India has seen outflows of only $200 million.

Market participants say this is due to macroeconomic stability and strong support from home-grown mutual funds. Also, most other EMs have been roiled by global trade tensions. India, on the other hand, has been relatively insulated due to its domestic consumption-driven economy.

Foreign investors had started pulling out money from EMs from February amid the hardening of US bond yields. The sell-off appeared intensifying last week after a financial crisis in Turkey spread fears of contagion. In 2018, Turkey’s lira has fallen over 40 per cent against the dollar. Other EM currencies, too, fell as foreign investors indulged in risk-off trading. While the rupee, too, has fallen over 7 per cent this year, domestic stocks have managed to take the sharp drop in their stride.

Goldman Sachs in a note acknowledged the improvement in India’s earnings, capital spending and credit growth. It said domestic equities could benefit from the Reserve Bank of India (RBI’s) intervention in the forex market, a decent monsoon, limited exposure to the EM contagion and the upcoming festive season. Citibank in a note said a lack of better choice in EMs and decent June-quarter results are aiding foreign investors’ interest in Indian equities.

The June quarter earnings of India Inc have also provided some cheer for domestic equities. The net profit of the 1,436 companies that reported June quarter results went up 7 per cent year-on-year. Corporate earnings have been tepid for the last three-four years on account of macroeconomic factors and the 2017 rally in the equities happened in absence of any earnings growth. However, earnings are now catching up as brokerages are anticipating over 20 per cent growth in net profit for this fiscal and also the next.

Macro stability is another factor that is helping Indian markets put up a better show compared to other EMs. The political and economic landscape of several EMs such as Turkey, Indonesia and Thailand is evoking concern among investors. While analysts don’t rule out short-term turbulence in Indian equities due to the forthcoming general elections, they believe India is relatively a better bet.