India no more best-performing emerging market

India, the best-performing among the emerging markets in the first four months of 2017, has since ceded this position to South Korea, discovers Pavan Burugula.

The Indian markets are up 24 per cent in dollar terms so far in 2017. South Korea has gained 25 per cent.

During the initial part of the year, India had a huge lead over other EM peers.

However, most have since played catch-up, with Mexico and Taiwan also delivering 20-plus per cent return.

While India continues to remain one of the most-preferred bets in the emerging markets (EMs), analysts say expensive valuations and unattractive earnings growth are limiting further upside.

"On our models, India no longer looks so attractive, though much of this on the thematic side is down to the impact of demonetisation negatively impacting earnings in calendar 2018 versus this year's bounce-back," said Niall MacLeod, Asian Equity Research Strategist at UBS Investment Bank, asking clients to switch to Indonesia from India.

"Unfortunately, however, the valuation expansion in India has taken the country back to looking less attractive on our fundamental framework," MacLeod added.

"We take it back to neutral for now," he explained, "though recognising that a big slowing in the rate of upgrades in the more cyclical parts of the region will inevitably draw attention back to India's better structural story."

Even in terms of foreign inflow, other EMs have raced past India.

While India has received foreign institutional investor flow of $7.35 billion, Korea and Taiwan have received $8.6 billion and $8.8 billion, respectively.

Mexico saw foreign investors pour $9.5 billion.

India continues to be the most expensive market among EMs in terms of the price to earnings (P/E) ratio.

The one-year forward P/E of the benchmark Nifty is 19 times. Analysts say the relatively cheaper valuations of other EMs provides comfort.

Interestingly, EMs have outperformed the developed markets during the year so far. The MSCI World Index is up 9.7 per cent in the year so far.

The developed markets have given returns in the range of five to 15 per cent. In comparison, the MSCI EM index is up 19 per cent this year.

The outperformance of EMs is mainly on account of two factors -- weakening of the dollar and revival in risk appetite among global investors.