Emerging (markets) Divergence?

Bull Market

2019 started off with a hope for India. Emerging markets took cues from easing tensions on trade war between China and US, falling treasury yields on hopes that Fed would change its hawkish stance on fears of looming slow down, softening crude on surging supplies amid slowing growth and above all from prospects of weakening dollar, to chart out a promising recovery in their equities and currencies. One doesn’t need to go beyond looking at MSCI emerging market index to get a grasp on this. This index is up over 7% since the onset of the New Year. That is quite a lot for an index that fell nearly 20% in 2018. But that is only one part of the story. The twist to the story comes from what is happening right here in the Indian markets.

India is not as lucky as other emerging markets when it comes to recovery. 2018 was a year of synchronized fall across emerging markets. India wasn’t spared with any special treatment during the broad based correction last year. But, in the recovery, it is getting singled out with step-motherly treatment, so to say. Since the dawn of New Year, Nifty is down near 3% (as on 30th Jan), reflecting 10% under-performance over MSCI emerging market index. Part of this reason could be rooted in the out-performance of Nifty in the fall last year (Nifty fell much less compared to other emerging markets). But, still, it doesn’t fully explain the reason for this odd divergence between Nifty and broad emerging markets. One would hope that this under-performance will get adjusted when more confidence emerges on the stronger earnings growth for FY2020.

As one looks ahead, with support coming from emerging markets on improved FII flows, it is question of time before India participates in the broad based emerging market rally. Meanwhile, during this odd un-explainable divergence period, market in its myopic mindset, once again is throwing brilliant opportunities for long term investors, esp. in small and mid-cap universe with fears and rumors ruling the roost in the broader space.

Happy Value Investing!

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