Sensex has underperformed Dow Jones Industrial Average by a wide margin in the past five months. While Dow has been steadily gaining ground since October last year, Sensex has been quite volatile and has slipped considerably this year. That said, India outperformed the Dow Jones in the last two years. While Sensex nearly doubled from about 10,000 levels in the latter half of 2008 to about 18,000 now, Dow Jones is up about 20% from 10,000 levels it was back then.

Both the indices, Dow and Sensex consist of 30 shares. Apart from the Nasdaq Composite and the S&P 500 Index, Dow Jones is one of the most closely tracked benchmark indices in the US.

From October, 2010 till date, the Dow has gained 14.1% even as the Sensex slipped 9.2%. While the Dow has given negative returns in just one of the past five months, the Sensex has been in the red for four months. Even more contrasting is the performance this year. While the Dow has given moderate returns of 6.4% in 2011, the Sensex has become one of the worst performing indices in the world, losing more than 11% this year.

In past two months, global fund flows have been directed to developed markets like the US given the latter ? s better-than-expected pace of eocnomic recovery. In contrast, macroeconomic headwinds such as inflationary pressures and rising interest rates as also scams have seen foreign funds moving out so far in 2011.

According to Vikram Kotak, CIO of Birla Sun Life Insurance, global investors have realised that stocks of several MNCs such as IBM, Unilever and Nestle are trading at attractive levels relative to their earnings in the US market and it is better to invest in the parent rather than their listed subsidiaries in the emerging markets. These MNCs get about 35% of their revenues from emerging markets. Kotak also believes that the pent up demand in the US, which has not seen much spending in the past two years, is helping the US economy. The US is expected to grow at 4% in 2011 with interest rates remaining low for an extended period.

In a recent report, Citi observed that it reiterated its increasingly non-consensus preference for Emerging Markets over Developed Markets in 2011. ?We repeat our call for 30% gains in EM equities to the end of the year,? the report said. Till late January, EMs had underperformed the DMs by 700 basis poinst since October, last year.