2009 and 2010 was a strong year for stock markets in the emerging markets including India. As the US and Europe continued to battle the worst financial crisis since the Great Depression, investors across the globe flocked to the emerging markets in the hope for better returns. As a result, stockmarkets in the emerging world zoomed. To such an extent, that valuations of many stocks in India at least were beginning to look quite expensive.
We are just one month into 2011 and the scenario seems to have reversed. This time developed market equities seem to have outperformed emerging markets. Does this mean that the developed market is beginning to show signs of good health? Quite the contrary. The economic scenario in the US and Europe remain as bleak as ever. The US is throwing money by the truckloads at all its problems little realizing that this will only pave the way for more disasters in the future. Meanwhile, more money in the hand of the consumers has hardly compelled them to go on a consumption spree. This is because the unemployment rate in the US has stubbornly refused to ebb from its high levels. And the US government as of now seems quite clueless when it comes to solving this problem.
Europe has been grappling with high debt for quite some time now. With some governments choosing to go for austerity measures to cut down on debt, it could be a while before an economic recovery takes meaningful shape. Thus, the preference for stocks of the developed world is more to do with the problems that the emerging nations are currently facing.
The biggest of them all is inflation. In India especially, food prices have been high for a while now and this has fuelled overall inflation. Although the RBI has been hiking rates for the past few quarters, inflation has yet to come down within the comfort levels of the central bank. Therefore, rising input costs could have an impact on the profitability of companies. Not just that commodity prices have also been rising. This is not only due to buoyant demand on account of a quicker recovery by the emerging countries but also because of money being poured into commodity markets for better returns. Already India Inc. has begun to feel the heat of rising raw material prices. Further, expensive valuations are another reason why there has been a meltdown in the stockmarkets of emerging nations in the year so far. As a result, because stock prices of companies in the developed world are looking more attractive than those in the emerging world, there has been a revived interest in the former.
In the long run, however, the growth story especially that of India remains intact. Thus, any correction in stock prices in the near term should certainly be looked upon as an opportunity to buy some good quality stocks at reasonable prices.