relative out performance of emerging markets

8/8/2019 Relative Out Performance of Emerging Markets

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Relative Out Performance of Emerging Markets

During Dec 2000 to Dec 2010

India's BSE out performed US DJIA and FTSE100 by over 370%

Prepared in Dec 2010; [email protected]


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During Last 11 Years, Net Return is ZERO for US DJIA (11,500 Jan 2000 vs. 11,500 Dec 2010) andDown 10% for EU FTSE100 (6500 Jan 2000 vs. 5900 Dec 2010).

Despite all the economic activities which happened during the last decade in USA and Europe, the net return for aninvestor was ZERO . This is what the data tells us, not our opinion or thought but the harsh reality. This too, whenwe have not included inflation into consideration, if we add that, investors lost a third of their investment in the lastdecade.

This is a well known fact on the Wall Street and in the City that more than 95% of the Money Managers can't beatthe benchmark index over a long period of time, so the net returns for an average investor will be worse than this.

We are also not including the trading expenses and money management charges as they will further increase the dentin the losses occurred.

We will not be wrong, if we say, that most of the investors in the developed markets lost around 50% of theirnet investment worth during the last decade despite all the claims made by investors across the board.

We don't see how the present economic and social problems faced by the developed markets will vanish overnightand what other changes will lead to better investment returns in the decade ahead. Even in US and Europe, thecompanies who had exposure to emerging markets did relatively well compared to their peers just focused on thedeveloped markets.

During the same duration when DJIA gave ZERO returns, India's BSE multi-folded by around 4 Times and this is just the beginning of Multi Decade Bull Market as also mentioned by Billionaire Rakesh Jhunjhunwala (WarrenBuffett of India).

This unbiased study is based on economic and financial data sets and should be an eye opener to all theinvestors to look beyond the boundaries and start investing in funds focused on emerging markets.


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During Dec 2000 - Dec 2010, India's BSE is up 380%,US DJIA is up 10%, FTSE is down 4% and Gold ETF is up 198%.


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India's BSE Outperformed US Dow Jones by 70% during Mar09 to Nov10 Proving True the Theory of Decoupling of Emerging Markets from Developed Markets.


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India's BSE Outperformed US Dow Jones by 40% during Apr08 to Nov10


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India's BSE Outperformed US Dow Jones by 35% during Oct07 to Nov10


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Increasing Federal Debt to GDP Ratio will bring down the profitability of US Inc.

Debt to GDP of a country reflects Leverage.Historically it is a known fact for a country, thatwhen the Debt to GDP ratio crosses 80%, it'sstock markets have done poorly.


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US DJIA was Sideways during 1945 to 1951 (6 Years) when the Debt toGDP ratio was above 80%.

The reason for under performance of stock market during this period is very clear, as when theleverage of the country is high, most of the country's earnings goes towards servicing the debt. Thisdeterioration in profits starts percolating in the Corporate world. Once the Debt to GDP ratio fell

below 80% and moved towards 40%, US economy flourished and the stock market rallied.


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US DJIA is Sideways During Jan 2008 to Dec 2010 when the Debt to GDPratio is above 80%.

If we simplify the Debt/GDP historic data and take the most optimistic view, it can be said thatmore than 4 years of sideways performance is left for US markets. EU Debt to GDP ratio is in muchworse shape. Only permanent viable option for the investors in developed market is to look towardsEmerging Markets where this ratio is still under control and will be like that for the decade ahead.


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Highlights of Indian EconomyMy comments on Indian economy from Year 2009:

Goldman Sachs economist Jim O' Neill was the first to show the potential significance of BRICeconomies in 2003. Their forecast of ~ 5% annual growth rate of India's GDP looked very optimisticat that time. Given the present growth rate, in 2008, they revised the estimate growth rate to 8.5%

per year for the next decade.

We now have a decade (2000 to 2009) worth of economic data to substantiate our thesis. Duringthe last decade, India's economy grew from USD 0.45 Trillion to USD 1.3 Trillion (3 times)averaging a solid growth of ~ 9% per year.

With this new feasible growth rate pegged, India's best days lies ahead and it has the potential to become the third largest economy by 2025 (nominal GDP of ~ USD 5 Trillion) after USA (estimate:USD 20 Trillion) and China (estimate: USD 19 Trillion).

Another fact to ponder: Based on purchasing power, India is already the 4th largest economy witha GDP(PPP) of ~ USD 3.9 Trillion, very close to Number 3, Japan (USD 4.4 Trillion).

One very crucial factor which further strengthens our thesis in India is the present resilience shown by Indian economy and companies. Despite the severe global downturn, internal political turmoiland many other inherent risks, India's nominal GDP grew by ~ 7.0% in 2009. This leads to anadditional confidence that starting 2010 when the global economy will recover, India may againstart growing close to 8.5% for the foreseeable future.


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Highlights of Indian Economy Contd. Another leading indicator is the great growth economic reality of China (which now is the secondlargest economy in the world with a nominal GDP of USD 4.9 Trillion). China's economic reform

started (late 1970's) more than a decade ago than India's reform (early 1990's) and in last twodecades, China has maintained close to 10% annual growth rate. Although China and India havedifferent economic growth model (China is a manufacturing based economy & India is a service

based economy) it gives us a fair reason to trust the assumption that India may also maintain its present 8.5% annual growth rate for the next decade.

Due to large human capital, knowledge base and natural resources, Indian economy should

continue to grow multi-folds along with it's companies for decades ahead.

Given the future constructive growth potential, key sectors like Construction, Real Estate, Retail,Financial, Insurance, Energy, Health Care, Media are all presently undervalued.

Economic dominance of Asia in the 21st century is going to boost India's economy as its growingtrade with China and Japan will provide additional growth. Starting 2015, Asia will startcontributing more to the world economy, an equivalent of USD 17 Trillion compared to UnitedState's USD 16.5 Trillion and Euro Zone's USD 16 Trillion .

Considering all of the above points, it is beneficial for global institutions to stay invested in theemerging markets as they present great growth potential. Also, India is starting from a lower base,so the net rate of return will always exceed the returns from the developed economies.


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My message to Managers in March 2008: Profitable opportunities for USinvestors in Mar 2008 China & Indiahttp://valueinvestornyc.blogspot.com/2010/09/my-message-to-managers-in-march-2008.html

Profitable opportunities for US investors in 2008 China & India

As per Jim Rogers, China and India in 2007 are what England was in 1807 and New York was in 1907. He has beenright about the fact that we entered commodities bull market in 1999. Since last decade China has outperformed inthe BRIC category and since last few years, India has shown tremendous potential opportunities for growth. Mymain message here to US investors is how they can increase their returns by investing in the Asian markets.Recently, times have been very tough in the US equity market, so US equity long only strategy is not proving to bea profitable one. So how can investors stay inside their circle of competence and still do new things which they

havent done before and generate good returns.Confidence of US investors is quite shaken in the present market scenario and they are bit skeptical about the futuremarket risks as well. In these conditions, it can be very hard for them to trust in countries they have never visited,forget about investing. In that case, one should look at smart investors like Jim Rogers who is long Asian marketsand profiting from their unprecedented growth since last one decade. Legendary investor like Warren Buffett for many years is investing in companies which have huge exposure to Asian market (for example ISCAR, Petro China,Coke)

The present statistics of the US equity market is indicating that stock market has not given the kind of return whichshareholders were looking for. Especially in the last one year, all the major sectors have got severely hit and stillthere are no signs of improvement in the coming few years. There are growing economic concerns over increase inUS trade deficits, falling dollar value, decline in housing value, severe credit crunch, and high commodity pricesleading to all time high inflation.
http://valueinvestornyc.blogspot.com/2010/09/my-message-to-managers-in-march-2008.html


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Financial sector has lost almost half of its value compared to last year, this is unprecedented as never was a timewhen the entire finance sector was so heavily leveraged. Now when the housing bubble burst is in its early innings,the impact can be seen all over the place, not leaving any sector intact. All the major hedge funds, mutual funds, assetmanagement companies have seen severe haircuts in their portfolio gains, reason being they are heavily allocatedtowards the US equity and not towards the commodity and emerging markets. Yes, they own little bit here and there

but not sufficient enough to cover up for the losses made by US equity group. In my opinion, there is an urgent needto change the portfolio allocation and apply few new investing strategies, while staying inside our circle of competence.

Following the footsteps of legends like Warren Buffett and Jim Rogers, I can see new ways in which US investorscan safely benefit from the Asias growth story. Since decades, Warren is concerned over the rising trade deficit of US, which will eventually devaluate its currency. At age 72, for the first time, to hedge for future currency losses, hewent short over dollar. Later on finding Petro China cheap on valuation basis, he bought half billion dollar worth of

the stock and made seven fold returns in three years. Berkshire has a majority stake in Coke and Warren likes itsAsian market more than that of the US. The main reason being the number of middle class consumers in Asia is nowcomparable to that here in US. It is well evident, that the per capita consumption of consumer good items is going toincrease in Asia at a much fast rate than in the US. Due to Warrens ability to look a decade ahead, makes theBerkshire Hathaway stock a safety net. Now looking at Jim Rogers, he is heavily bullish over Asia and is investedtheir through stocks and commodities since a long time. He understands the need to go long over commodities as theentire Asian countries need it to fuel their economic growth. So the lessons which we can take from these twolegendary investors are to focus on Asian stock market and going long over commodities. Initially these two

combined can be a small part of the portfolio and based on the experience, one can vary his allocation. In the USequity part of the portfolio, one needs to be long on companies, who are heavily exposed to countries outside the US,so that they can hedge against the dollar decline.

In the next page, I will do a small case study on chances and effects of US going into recession.


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Case study: Chances of US going into a recession and what it means for the US investors

Case 1: US economy escapes a recession. In July 2008 GDP shows a marginal growth over past 2quarters & mortgage crisis is over and all the consumer indexes show an uptrend.

Probability of Case 1 happening 10%.

If this happens, then there is no need for investors to change their portfolio allocation and they cancontinue with their present strategies.Case 2: US economy enters a mild recession i.e. of close to 1.5 years and we see GDP growth inJuly 2009 and all other problems get over.


In this case, investors have to change their strategy and portfolio allocation by 15%, it means theyhave to look for opportunities outside US and look for other strategies other than US equity longonly, like short dollar, short financials to name a few.Case 3: US economy enters a medium term recession for 2.5 years and economy recovers by July2010 and by then the mortgage crisis is over, consumer is back, spending.


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In this case, investors have to really take a closer look at their portfolio and change their allocation by at least 25% and get exposed to Asian market, ETF, currency, real estate, commodities. If there is

a good return, then they can increase their portfolio allocation. Rest of the 75% of portfolio needs to be only in companies which are present around the globe, to be hedged against any major risk in USeconomy.

Case 4: US economy enters a severe recession by not showing any improvement till July 2011


If this happens then the ideal thing will be to change the portfolio considerably & look for deepvalue in the US equity market, buy stocks with long term potential at a great margin of safety. In thecurrent scenario, if the US economy goes into recession, then it will not spare the economic growtharound the globe. Decoupling theory is proving to be wrong as cracks in the global market is clearlyevident. Still the fact remains that 2.5 billion people live in China and India and most of them are

productive and contribute daily towards the growth of their nation. Also the scope of growth is

immense, as at present, basic infrastructure is not present in these two countries. Pretty soon whenthe well educated human capital will start delivering in every possible sector, then one cannot ignorethe positive outcome. In those circumstances, the growth will be phenomenal, creating a cycle of more development, more jobs, high income, leading to higher living standards, meaning morespending, more demand and hence more supply. So now is the time to understand the Asianeconomic cycle to reap the fruits of future growth.


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Conclusion: This the Right Time to Invest in India and Other Emerging Markets

One has to go beyond the low cost labor and think in terms of Wealth at the bottom of the pyramid. Once the middle class of both the nations rises, then the consumption cycle will lead to

massive growth. China has prowess in manufacturing and India is advanced in the service sector.Going forward there is going to be a great symbiosis in between China and India in terms of

business relationships and that will accelerate their economic development. The US companies whoare located there will enjoy massive growth few years down the line. Major profit share will go tothe local companies who understand its consumers lot better than their US counterparts. So to getthe real growth one needs to look at the future prospects of these local companies and include intheir research. Investors can focus on the kind of companies they invest in US market and look for similar companies in the Asian market and search for value. In this way they will stay inside their circle of competence and will be able to increase their returns.

For investors, fund managers, my suggestion is to modify their portfolio capital allocation, look for high quality emerging market stocks, ETFs, essential commodities and focus on companies withhigh exposure to Asia. By changing their strategies towards emerging markets, they can reap

immensely going forward and hedge against any future slowdown in the developed markets.

Disclaimer: This Report is for information purpose only and express our views about the company, not an offer to buy or sell. Risks involved in investing is not suitable for all kinds of investors. Seek professional advice if this research is suitable for you.

relative out performance of emerging markets

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