Investing pattern in Bric countries

India has emerged as one of the most attractive investment destination in the world. Merchant bankers and analysts feel this trend is likely to continue.

According to the Morgan Stanley Capital International (MSCI) Equity Indices, which compares the returns from various markets, India has given the second highest annual return at 38.36% among the BRIC (Brazil, Russia, India and China) countries in the last five years.

The best return was given by Brazil at 46.19%. This means, an investment of Rs 1 lakh in the Indian market, would have become Rs 5.07 lakh in the five years and Rs 6.68 lakh in Brazil. The Chinese market, which is the largest emerging market in the world, gave an annual return of 31.36% and Russia 33.32% in the last 5 years.

But when it translates into actual gain the difference is huge. An investment of Rs 1 lakh in China would have become Rs 3.91 lakh and in Russia Rs 4.21 lakh. But the annual returns in the developed countries like US and Japan is low at 9.29% and 11.27% respectively. This means, an investment of Rs 1 lakh would have become only Rs 1.56 lakh and Rs 1.71 lakh respectively.

Similarly in the last three years and one year, the Indian stock market has given handsome return in the region of around 50% compounded annually. Against this, developed countries like US gave returns of 11% and 20% while Japan 13% and 9%.

The low returns from the developed stock markets, have made the investments from these countries to flow into emerging markets. Here, India has provided a huge opportunity for foreign investors, resulting into large inflow of funds. According to SBI Cap, India received FII investment to the tune of $ 4.27 billion, which is the second highest in the Asian markets. Taiwan received $ 7.47 billion during the period.

The main reason which has enabled Indian market to attract investors is its strong fundamentals and good returns being earned by the companies. The market is attracting huge investments because of high returns.

On top of this, appreciation in rupee has further increased the return in dollar term in the last six months. The return from Indian stock market has gone up to over 57% in the last one year, resulting into foreign investors are rushing to invest. India has become a must destination in almost all foreign investors’ portfolio. This has led creation of huge liquidity in the market and has provided further momentum to the upward movements of the stock prices.

Indian sensex stocks are quoting at an average of around 21.50 times of their underlying profit. Against this, the Chinese companies’ share prices are quoting at over 41 times of their underlying earnings. The high multiples at which the share prices of Indian companies are quoting is mainly is mainly because of their earnings.

Therefore, Chinese stocks are being considered as costlier than Indians. Therefore Indian stock market at present looks the most attractive one.

In the nominal terms, Indian sensex companies profit is growing at around 20%. Experts feel that such a high growth in the profitability is likely to continue in the medium term.

Against this, the share prices of companies in US and Japan are quoting at 18 and 38 times of their underlying earnings. This is despite the fact that the growth in the earnings of the companies in these countries are at much lower level of around 7%.

Companies in Russia and Brazil are quoting at much lower multiples of their underlying earnings at 11 and 12 times respectively. But, the Brazilian economy grew at only 3.7% in 2006 as against 9.2% of India. Even Russian economy grew at only 6.7%. Because of lower growth rate the companies in Russia and Brazil are trading the low multiple of underlying earnings.