After a dismal 2011, MSCI India has had a strong start to the year, up 17.1% YTD, meaningfully out-performing regional peers and even other BRIC and most other high-beta markets. This, in many ways, is the opposite of the market's 2011 start, when it fell and under-performed peers sharply, in January, which then continued for the rest of the year.
In our view, last year's selloff – particularly in November and December - was overdone. MSCI India fell 21% in the final two months of 2011, the worst performance among all EM countries, while the Rupee followed suit (exacerbating the declines in the dollar MSCI index), and was down over 18% from its peak at one point in time.
Certainly, the static economic and political decision-making environment proved a significant overhang on an already weak market. Growth expectations for 2011 slipped from 8%+ to sub 7%, while interest rates were hiked 13 times in the tightening cycle that continued until December, which also
contributed to weaker markets.
So far this year, India has outperformed partly because the market is coming off a low base, while the global risk environment has improved – equity markets across the world have bounced back (MSCI ACWorld +5.2% YTD).
Furthermore, India's year-to-date outperformance likely reflects a mix of subsiding WPI inflation (down by 160bps to 7.5% in December), expectations that interest rates will be cut sooner than later (boosted also by the unexpected cut in reserve requirements on January 24), and that downward earnings revisions appear to have bottomed out (see Figure 34 below) for the time being.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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