Most of the global indices had witnessed a strong rally during the period from March-December 2009 due to positive fundamentals and earnings upgrade. However, since the beginning of 2010, major global indices have remained flat due to concerns regarding the pace of global economic recovery, outlook for sovereign debt and the fiscal problems faced by the Portugal, Italy, Ireland, Greece and Spain (PIIGS). Nonetheless, at the same time, one of the main drivers for stock market i.e., corporate earnings has shown a growing trend for most of the countries.
Analysis of 19 markets
The Fundsupermart.com research team has done an exhaustive study of 19 markets on their estimated earnings and fair valuations. As per the analysis, the global economy has been on a recovery phase since the second half of 2009, after hitting a rock bottom in the first half of 2009 and earnings are expected to hit record levels by the end of 2012. For certain markets, earnings are already expected to see a record level in 2010. The study has also observed that the actual earnings may turn out to be even higher than consensus estimates, given the fact that earnings estimates from arious brokerage houses remain fairly cautious following the global financial crisis. In addition to that, there is a close correlation between stock market performance and corporate earnings trends historically. Based on the consensus estimates, the study concludes that many global markets like Asia excluding-Japan, global emerging markets, Brazil, Hong Kong, Indonesia, Malaysia, Taiwan, Singapore, South Korea and the US are likely to hit record high levels by end-2012.
In the above table, we can see that many markets are expected to grow very strongly in the next few years and based on forward earnings estimates, markets like China, Hong Kong, South Korea, MSCI Emerging Markets etc., are trading at attractive valuations and have been rated as very attractive - 4.5 stars (out of 5) by Fundsupermart.com.
Based on estimated earnings and fair P/E for 19 markets, the study states that many of the global markets are expected to give returns in the range of 30% to 50% in next 24 to 30 months.
A perusal of chart 3 shows that many global markets are still trading below their December 2007 levels when they were trading to their recent highs. Thus, given the current scenario, investing abroad could be a wise call and funds that invest globally provide an attractive investment opportunity for Indian investors for the next 2 to 3 years.
Avenues to Invest Globally for Indian Investors
For retail investors, investment in international countries is still a new and relatively unexplored area. However with the easing of investment norms by the regulator, including the increase in the aggregate ceiling for the mutual fund industry to invest in foreign securities or mutual funds to a sum up toUS$7 billion, investments in foreign markets can grow much more than before. Within this limit, an individual mutual fund can make overseas investments in foreign securities and feeder funds to a maximum of US$ 300 million. This has led to launches of international funds through the Fund of Fund (F-o-F) route or investing directly in International Equities by many Asset Management Companies (AMCs). Fund of Funds is an investment strategy that invests in other funds rather than investing directly in shares of companies. The underlying fund can be from the parent company or from any other AMC.
Presently, there are around 28 funds which invest in global markets and Indian investors have an option to expose themselves to a variety of themes like Emerging and Developed Markets or equities of commodity producing companies, Gold mining companies, Agriculture, Real Estate and Infrastructure companies. But in this article, we have highlighted only funds that have a mandate allowing them to invest 100% of their assets in foreign equities and/or in a particular country, and in diversified global equities without being restricted to specific sectors or themes. The various funds available after the filtering process are shown in Chart 4.
Chart 1: Performance of Global Indices (March 2009 - September 2010)
Chart 2: Earnings Growth and Valuation of Key International Indices
Chart 3: Performance of Global Indices (December 2007 - September 2010)