Indian indices perform better than emerging market counterparts in 2021

Nifty has gained 17% YTD in dollar terms, best among headline EM indices

The Indian markets have outperformed their emerging market (EM) peers on a year-to-date (YTD) basis, supported by a combination of favourable short-term and medium-term factors. The benchmark Nifty has gained 17 per cent YTD in dollar terms, the best returns amongst headline EM indices. The  Nifty's outperformance has been consistent — it has also bettered its EM peers over one-month and three-months periods.
 
Analysts said the positive news on reduction in daily increase of Covid-19 cases over the past month and a revival in economic indicators and earnings are the reason for the better performance. Rising expectations of a multi-year investment cycle in corporate and household segments and excitement around the listing of start-ups with exciting new business models have also helped the Nifty post stellar returns.
 
“Valuations of the Indian market look full and are supported by expectations of strong earnings growth over FY21-23 and stable-to-modestly higher interest rates/bond yields over the next few months,” said a note by Kotak Institutional Equities.
 
What has also worked in India’s favour is the enthusiastic participation of retail investors.
 
“In many EMs there was a slowdown because of the spread of the virus. This was seen in South Korea, Indonesia, Malaysia, Philippines. In India, we had strong retail flows along with the fact that global markets have been quite good. So, we haven’t lost as much as other EMs. And going forward, mass vaccinations continue at a high pace. Economic indicators and earnings have started to pickup, and that will carry the markets forward,” said Andrew Holland, chief executive officer of Avendus Capital Alternate Strategies.

He added that initial public offerings (IPOs) in the India market will provide foreign investors more alternatives in industries that they could not invest in before.
 
Analysts further said that the sharp decline in market capitalisation in China in general and technology stocks had dragged EMs’ YTD performance into negative territory, while developed markets’ performance was fairly strong.
 
For the past few months, the Chinese market has seen continued foreign portfolio investor (FPI) inflows, which has dwarfed the inflows into India. This is despite the general negative perception around the Chinese market after recent regulatory actions against several high-profile companies in the consumer, internet, and luxury sectors. On the other hand, other EMs such as South Korea and Taiwan have seen large outflows so far in 2021, while India has seen moderate inflows —FPIs have bought shares worth Rs 53,169 crore so far this year.
 
Some analysts expressed confidence about a catch-up trade for emerging markets.
 
“Emerging markets have underperformed quite a lot and money went to developed markets. Now, there is a feeling that EMs will start to see more inflows once they open up. We are yet to open up fully to get the full benefits of developed markets, where people are getting out and spending,” said Holland.