The Hindu Business Line : Sensex, Nifty dance to the tune of global forces

FOR those of you who lost money last week, it may be of some consolation to know that your experience was not unique. You could almost say that stock meltdowns, like inflation and corruption, are global in sweep.

Fund flows from institutional investors have ensured that markets move in a synchronised fashion. They make sure your woes are shared by those elsewhere. By the same token, you too are hostage to what happens outside.

For instance, in the period since April 30, markets in Taiwan and Korea have lost as much as the Indian markets. Political uncertainty has sparked a meltdown in prices even in these countries. The Sensex and the Nifty have been swaying not only to the proximate domestic causes but also to the pull of global forces, for some years now. The correlation has existed since 1996 and has increased in the period since 2001.

The relationship between Sensex and such indices can be measured by calculating the correlation between Morgan Stanley Capital International (MSCI) and Sensex. MSCI's index is the benchmark for emerging global market funds. In the period since end-1996, just more than 50 per cent of the monthly return generated by Sensex is explained by the changes in Morgan Stanley Capital International's Emerging Market Index. In the period since April 2001, the explanatory power of the emerging market index has risen to 66 per cent. The correlation of MSCI with BSE 200 is also high, as it is with the monthly returns of the net asset values of schemes such as Franklin India Bluechip, Templeton India Growth and HDFC Equity.

So, is the correlation spurious? Fund managers to whom we spoke acknowledge the existence of the correlation. Mr S. V. Prasad, Chief Executive Officer, Birla Sunlife Asset Management, said it reflected what was happening in the markets and attributed it to the influence exerted by foreign funds on domestic markets. Mr Ajay Bagga, Chief Executive Officer, Kotak Mahindra Mutual Fund, indicated that our stock markets will tend to move in the same direction as other emerging markets because they were all driven by FII flows.

These fund managers also indicated the correlation was not justified since the Indian economy was not as integrated with the global economy like some of the other Asian economies.

On whether the correlation would rise in future, their opinions were, however, divided. Mr Bagga said the correlation would keep increasing since rising trade would integrate the Indian economy with the rest of the world. Mr Prasad, however, contented that if large domestic funds emerged to counterbalance the effect of FIIs, then correlation would decline.

Interestingly, fund managers unanimously suggested this correlation was not a factor in their portfolio construction.

For instance, the correlation of MSCI's Emerging Market Index with CNX Midcap 200 index was lower compared to that of the Sensex or BSE 200. This, they say, would not force them to invest more in mid-cap stocks. In fact, one fund manager commented that correlation of mid-cap stocks may be lower but the risks would also be correspondingly higher.

Mr S.V. Prasad, on the other hand, indicated that they adopt a stock specific approach to investing and that won't change.

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Sensex, Nifty dance to the tune of global forces — Correlation with emerging markets