India can do a Brazil

After being one of the best emerging market performers in 2007, India has disappointed this year, underperforming the Dow Jones Industrial Average (DJIA). India is now viewed as a very risky market, notwithstanding the robust economic growth prospects, moderate inflation and strong currency.The sensex declined 8.3% over the past one month ending March 7, while DJIA declined by 2.4% only. But while almost all emerging markets have crashed, Brazil���s benchmark index Bovespa continues to outperform DJIA; the index rose 4.7% over the same period, demonstrating signs of decoupling.One reason for the contrarian behaviour of the Brazilian market could be the significantly high weight for natural resources companies ��� metals and petroleum ��� on the 64-member Bovespa. The sell-off in global markets, triggered by the subprime crisis in the United States, is an exercise in risk aversion on the part of investors. That begs the question as to why India is seen as a riskier market than the US or Brazil.Of the three, India is projected to expand the most; the IMF estimates that India will grow by 8.4% in 2008 while Brazil may expand by 4.1% and the US by 1.9%. Inflation in both countries is displaying similar trends; rising again after moderating over the course of the past year. Again, the global slowdown would hurt both countries ��� while Brazil would see export growth for commodities slow down, India���s manufactured merchandise and services trade are likely to see further moderation.A minor deceleration notwithstanding, India���s growth story remains intact. The largely investment-led growth is a reflection of the expectation that domestic consumption is likely to remain robust in the years ahead. The deep correction in the market that began early January has made valuations of blue-chips very attractive.There is no reason why Indian markets should continue to track the US or Japanese markets; the US is said to be already in recession and Japan too is getting close to one. It is time investors considered the fundamentals of the Indian economy and the strength of corporate earnings.Institutional investors, particularly mutual funds, need to play a pivotal role in reposing their faith in Indian stocks. And that is essential if India, like Brazil, has to begin decoupling from the developments in the advanced markets.