India is among the top three equity markets in the world on a risk-adjusted return basis. An FE study of 15 popular global indices over the last ten years, found that India trailed Indonesia and Russia and in that order. With similar risk existing across most equity markets, returns in effect became the determining factor in overall scores.
The overall return givings of an equity market were found to have a higher correlation to growth rates of that economy during that period, even though the chinese market remained an exception.
In the last ten years, Jakarta Composite (Indonesia) gave a return of 936%, which was lower than that of Russia?s MICEX return of 1181%; highest for the group. Yet, Jakarta emerged on top because of below average risk-score. The Russian market with its strong linkages to energy prices, remained riskiest of the lot, all thanks to volatile oil prices.
Gopal Agrawal, head of Equity, Mirae Asset Global Investments, said that the political stability acquired by Indonesia is the cause of its high returns. ?After 25 years there was a full majority (in the government), and the most important factor is political stability.? He said it was also helped by higher gold agri-commodity prices. For commodity producing countries such as Russia, commodity boom in the last decade helped get the highest returns.
After Indonesia and Russia, the next best risk-adjusted return scores were that of the Sensex, Korean KOSPI and the Brazilian Bovespa. In contrast, France?s CAC 40 and Japan?s Nikkei 225 had the lowest scores among the 15 major global indices considered for the story.
Interestingly, in terms of risk, most equity markets were found to have scores in a narrower band suggesting the effect of global linkages. Global portfolio investors with investment mandates across regions are increasingly creating higher and sustained volatility across markets. While Dow Jones was found to have the least volatile index, it was followed by Singapore Strait Times and UK?s FTSE 100. The most volatile index was MICEX, followed by Bovespa.
Among the Bric countries, China, i.e. the Shanghai SE Composite, is the only one to have given lower returns despite strong growth rates in its economy. It had a slightly higher-than-average risk against lower absolute returns. Agrawal feels that China has not performed as well as the other Bric countries since the global financial crisis struck with its stimulus packages impacting banks? balance sheets.
Vetri Subramaniam, head of Equity Funds, Religare Mututal Funds said, ?China?s stock market has always been beating to a different tune. It has been an outlier to other global markets.?
In the 90s, the developed markets did the best with Dow Jones leading the pack. Now, the emerging markets are doing better and the developed markets are doing worse, Subramaniam added.
Countries with recent economic and/or political reform, or in other words emerging markets, have done far better than developed countries over the decade. The resignation of General Suharto in 1998, for instance, helped bring political stability to Indonesia. The liberalisation of the Indian economy which gathered steam in the last decade helped the Sensex?s returns immensely.