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Global Markets expected to hit new Highs by end of 2012 - Invest in Global Funds!!
October 20, 2010

In this article, we have highlighted that the earnings forecasts of many global markets are expected to reach all-time highs in the next two years. The anticipated earnings projections could translate into equity markets reaching record high levels. This could translate into a very good opportunity for investors in India to add Global funds in their portfolio.


Author : Nikhil Kothari



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Global Recovery

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)

Performance of Global Indices (March 2009 - September 2010)

Chart 2: Earnings Growth and Valuation of Key International Indices

Earnings Growth and Valuation of Key International Indices

Chart 3: Performance of Global Indices (December 2007 - September 2010)

Performance of Global Indices (December 2007 - September 2010)

Chart 4: Global funds available to Indian Investors

 
Performance
Scheme Name
Corpus (in Crore)
Theme
Type
6 Months (Absolute)
1 Year (Annualised)
2 Year (Annualised)
Birla Sun Life International Equity Fund Plan A 104.96 Diversified Global Invest Directly in Companies -0.27 -1.12 0.08
Franklin Asian Equity Fund 278.11 Asia Ex Japan Invest Directly in Companies 6.08 6.46 18.36
HSBC Emerging Markets Fund 65.76 Emerging Markets FoF -HSBC GEM Equity 3.99 2.03 9.59
ING Latin America Equity Fund 35.95 Latin America FoF - ING (L) Invest Latin America Fund 5.80 14.89 17.33
JPMorgan JF Greater China Equity Offshore Fund 68.08 (31-Aug-10) China FoF - JF Greater China Equity Fund 5.47 5.59 --
Kotak Global Emerging Market Fund 165.58 Emerging Markets FoF - T.Rowe Price Funds SICAV - Global Emerging Markets Fund 7.54 9.62 11.85
Mirae Asset China Advantage Fund 26.99 China FoF - Mirae Asset China Sector Leader Equity Fund 9.90 -- --
PRINCIPAL Global Opportunities Fund 80.44 Emerging Markets FoF - Principal Global Investors Funds - Emerging Market Equity Fund 6.86 8.69 14.23
Sundaram BNP Paribas Global Advantage Fund 81.91 Diversified Global FoF - Invest in Various funds 3.93 9.89 12.90
Source: MFI Explorer, iFAST Compilation. Data as on 30 September 2010

It can be seen from the above table that there are 9 funds which invest in diversified global equities and investors can choose from these funds. However before investing in global funds, investors should keep in mind that from the taxation perspective all these funds are treated as debt funds i.e., if an investor remains invested in the fund longer than a year he/she will be charged at the rate of 10% without indexation and 20% with indexation on the gains and if he/she stays invested for less than a year, he/she will be taxed as per his marginal tax bracket. Also, apart from market risks, which are inherent in all equity linked products, the global funds carry foreign exchange (currency) risk. The fund effectively makes a loss if the Indian Rupee appreciates against underlying foreign currency/currencies and vice versa. Moreover, the track record of the funds has not been very encouraging and most of that are also concentrated on emerging markets.

Conclusion

Global Funds are still at nascent stage in the Indian Mutual Fund industry and Assests Under Management (AUM) is very small so it is evident that these funds are still not widely accepted by Indian investors.

In the current scenario, we see that there are good investments opportunities in global markets as earnings of global companies are expected to increase substantially. Despite this, the positive sentiments are shrouded with apprehensions of a double-dip recession and slow global recovery.

Hence, we believe that this is an opportune time to add some exposure to global funds as it helps in bringing geographical diversification and also, has the potential to earn better returns over next few years. Overall, we feel that moderate and aggressive risk appetite investors can have a 5% to 15% of their portfolio in global funds from an asset allocation perspective.

 


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.



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