Emerging, developed market gulf widens

The gulf between the performance of emerging and developed market indices is widening. In the calendar year 2015, the MSCI indices for emerging markets slid 17 per cent, its worst annual performance since 2011.

It was also the fifth straight year of underperformance for the emerging market indices versus developed market indices, which slid only 2.7 per cent in the year.

The divergence seems more pronounced over a five year period beginning January 2011. While the MSCI World index has risen 27 per cent, MSCI Emerging Market index has shed 33 per cent in the period.

With the risk-off sentiment making a comeback, overseas investors have become increasingly wary of investing in emerging markets. Sentiment has become bearish owing to a sharp drop in commodity prices and a slowdown in China. A slump in commodity prices has particularly impacted markets such as Brazil, Russia and Indonesia.

A rising dollar spells more bad news for emerging markets, as it will weaken emerging market currencies further. Global investors will be hesitant to allocate money to emerging markets, as weakening currencies will eat into their gains.

India, however, seems to be better placed within the emerging market basket, as it is growing at a faster rate than the others and its currency has held up well against the US dollar in the past year. With sizeable forex reserves, a steep depreciation in 2016 is unlikely.

Earnings growth is likely to pick up pace in the second half of the year, and if reforms measures like the goods and services tax and land acquisition Bills go through, it will likely lead to a rerating of the market.