A maturing market amid the mayhem
China, India stock markets — brothers in development but not twins
A lot of comparisons are made between China and India but there are myriad differences between the two developing nations — some wide, some not so wide. It would be a huge mistake to believe the two markets and economies are developing along similar lines, or indeed, behaving in the same way, particularly the financial markets.
Take the respective stock markets. The first chart shows the last decade of both India’s benchmark SENSEX stock index and China’s Shanghai Composite. One thing that is immediately evident is that the Composite outperformed India by a long way in the run-up to the very overblown highs. In fact, using 2005 as a starting point it put on a staggering 380 percent while the SENSEX managed 225 percent over the same period.
When the crunch came, the fall was as dramatic as the rally and both markets collapsed with the Composite dropping to a low 73 percent off the peak and the SENSEX 64 percent.
In terms of investment $100 invested in both markets in 2005 before the respective rallies got underway would today be worth $242 (China) and $228 (India) respectively, not a huge amount of difference between the two in terms of overall performance over the period.
If you look at that return on an annualized basis, it comes in at around 35 percent a year which is an excellent return on capital and long-term investors in either market should have no complaints.
It also compares with Wall Street where the Standard & Poor’s 500 index is actually around 20 percent lower over the same period and the Dow Jones around 15 percent down.
The second chart shows the recovery since the lows with the rally in the Composite looking smooth and constant while the SENSEX rally is noisy and intermittent, not least because of that huge price gap which happened after the Indian election when the ruling Congress Party won a much bigger majority than anyone had expected.
This huge jump reflects one of the fundamental differences between the two markets and that is uncertainty over policy.
China simply has a much more stable policy outlook than India and that is reflected in the price behavior of the two markets.
Despite a degree of uncertainty over Indian policy, both markets are doing very well relative to the world’s developed stock markets as measured by the MSCI World Index of 23 developed stock markets.
The third and fourth charts show the stock market’s relative performance since the turn of the year. The Composite is currently outperforming the MSCI World by a very respectable 58 percent, the SENSEX is outperforming by 45 percent but has only really started performing since the election as you can see. Another indication that policy uncertainty has been holding the India market back.
Much of this stock performance of course has a lot to do with how the underlying economies are doing and, in fact, both are not doing so bad considering the dire growth numbers we are seeing elsewhere in the world.
If you look at respective Gross Domestic Product(GDP) data, China and India are looking very good indeed. The graphic shows forecasts for this year’s growth and next and it’s clear to see that compared with other developing markets and the world in general China and India are set up pretty well, China much better in fact.
So it’s reasonable to assume that both stock markets will continue to do well, although the China stock markets are on a more solid footing and gains should outpace those of India if past performance is anything to go by and if there are no global upsets to alter the ongoing GDP growth picture.
For regular updates on Technical Analysis for both the India and China stock markets see my website www.reutersindia.net