However, a period of high growth in an asset class or region raises the spectre of a significant correction if driven by a rapid swing in market sentiment.
Indian equities have been the place to be in 2014 following the ushering in of a sustained period of increasingly positive investor sentiment after the election of Narendra Modi in March.
Voters in the nation of more than one billion people handed Modi a landslide victory favouring his pro-business agenda. He also pledged to reform a host of protectionist and tax policies that have stemmed the flow of foreign capital into the country over the past decade.
The MSCI India index has been the standout performer in both developed and emerging markets this year. While conditions have been fairly flat in developed markets, India has gained 35.43 per cent.
The second best performer of the major indices was the S&P 500, which gained 16.49 per cent – less than half.
Performance of indices in 2014
Source: FE Analytics
India’s stock market has also bucked the trend compared to the other major emerging markets – Brazil, Russia and China – which in the case of the first two are down. The MSCI China is up 8.47 per cent but has also seen several periods of significant selling by investors.
Performance of indices in 2014
Source: FE Analytics
While investors may hold specialist India funds or a tracker of the MSCI India, a significant number of funds in the IMA Global Emerging Markets index have Indian exposure.
In the sector 52 funds have an overweight position to Indian equities while 15 funds have more than 15 per cent of their portfolios exposed.
But should investors be looking to lower their exposure to the country after its strong run?
India’s rally looks set to continue, according to Russ Koesterich, Blackrock’s global chief investment strategist, who says a falling oil price will be a significant boon to Indian equities.
He says because of the huge amount of oil the country imports – some 85 per cent of its oil is imported – a lower price will boost markets and lower inflation.
“Cheaper oil prices are helping to lower India's chronically high inflation rate [now down to 6.5 per cent] and, given large government energy subsidies, aiding the country's fiscal position. Lower oil prices, coupled with further reforms from the new Modi-led government, helped Indian equities hit an all-time high in October,” he said.
The performance of oil has been one of the biggest surprises of the past few months. Even though tension severely heightened in the Middle East and Russia – both very important for global energy supply – the price has plummeted by almost 21 per cent.
Performance of index in 2014
Source: FE Analytics
Mark Tinker, head of AXA Framlington Asia, disagrees and says keeping faith in the rally in Indian equities due to a falling oil price is risky.
“Lower oil prices are great for Asian importers – though at least partially offset by currency – but we should not lose sight of the fact that in the two great ‘noise trade’ markets of the moment, India and Indonesia, there are heavy subsidies on fuel,” he said.
“The benefit of lower oil prices will go to government rather than consumers. This is not a bad thing per se, but we need to ensure consistency. Have these markets chased up on a lower government deficit, or on higher growth?”
“Sure the government is expected to spend on infrastructure, but this doesn’t really change their ability to do so. To use a word of caution, in India Mr Modi has taken the opportunity to slash the fuel subsidies, which is all very well except it exposes the Indian consumer more fully should oil prices rise again. It’s a little bit like switching households to floating rate mortgages at the lows, the balance of risk is for a negative future impact.”
Paul Warner, managing director of Minerva Fund Managers, says it may be sage to lock in some profits for investors that have seen a decent uptick.
“It depends on an investor’s time horizon,” he said. “Definitely, we are moving to a stage where you should be thinking about taking profits but only because we now need to see some of the reforms coming through.”
“If you are on a six-month time horizon, you should definitely take some profits but if you are on a greater than 12-month horizon then actually they are a good bet to stay at least partly invested.”
Warner says the passing of Modi’s pledged reforms will send the market even higher.
“Like China was a major game-changer in the last decade it could well be that India could be the game changer in the next decade but you need to know the reforms will happen.”