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Market Watch: The curse on the outperformer

Most global analysts still expect emerging markets to outperform the US in 2008, on the back of superior growth, writes Udayan Mukherjee.

business Updated: Apr 03, 2008 20:53 IST
Udayan Mukherjee

Doesn’t it strike you as odd that the US market is among the top 3 performing global markets in 2008? It is supposed to be at the heart of the world's economic problems yet just look at the facts: the Chinese stock market is down 35 per cent so far in 2008, the Sensex 25 per cent and the Dow Jones index only 5 per cent. It's startling.

Part of the reason lies in recent history. The US has been one of the worst performing markets in the last couple of years. In the 18-month period of serious emerging market outperformance between June 2006 and January 2008, China went up 213 per cent, India 106 per cent, Brazil 66 per cent, while the Dow could only limp up 16 per cent. So one could argue that the US need not pull back so sharply as it never went up much to begin with. It was a rank underperformer, so the capacity to beat it down significantly is much less. It's somewhat like our underperforming sectors like pharma, IT and FMCG.

They had underperformed so vastly in the last couple of years that they are now falling much less than their more glamorous peers. The favourite whipping boys are the ones which ran up the most on an aura of invincibility. Now that cracks are appearing in their seemingly perpetual growth stories, investors are selling them with a vengeance. Just as it is with sectors like power, infrastructure and financial services. The most loved, the most hyped, the most richly valued and the most overowned always correct the most; whether it's sectors or markets. Who knows, maybe the commodity complex is next.

Also, since markets move much ahead of actual economic events it isn't unusual to see markets and currencies actually rebounding in the midst of recessions. In the 2001 US recession, the dollar actually appreciated 5 per cent against the yen, in the 1991 recession the dollar was flat versus the pound. This is because currency and stock markets get oversold leading up to the actual event and then rebound. Maybe that is why the US has stopped falling in the last quarter even as Asian markets have collapsed.

Most global analysts still expect emerging markets to outperform the US in 2008, on the back of superior growth. Yet, equity market performance is often about growth expectations rather than absolute growth numbers. If growth in Asia is reasonable in absolute terms but much lower than expected earlier, then this surprising underperformance relative to the US may well continue a bit longer. Ditto with the dollar. Remember, every dog has his day.