The Hindu Business Line : Sensex underperforms global indices

The most popular barometer of the Indian stock markets, the Sensex, scaled a new intra-day peak of 14,745.9 on Monday, compared to the previous record high of 14,723.

The event was greeted by a wave of celebrations by market participants who had been waiting for this occasion ever since the Nifty scaled a new high on May 21.

But the Sensex has been well behind some of its global peers in scaling new highs this year.

Not only has it lagged behind the Nifty in recovering from the February correction, it has under-performed other global indices too.

There was a wave of correction across global markets in February 2007 caused by the Chinese regulatory authorities’ clampdown on illegal investments.

The domino effect of this move led to an exodus of investments from emerging markets and a sell-off in other markets.

Most of the overseas markets have since shrugged off this correction and scaled new peaks in less than two months.

The US indices are currently moving sideways, 2-4 per cent above their February peak.

The European Indices too are firmly placed above this high.

The Chinese markets are currently trading 31 per cent above their February highs.

The Sensex has taken about five months to catch up. The under-performance can be partly attributed to the Reserve Bank of India’s fight against inflation in the first three months of the 2007 calendar, while some of the other Central banks such as the US Fed, have been on hold.

The RBI increased rates twice in this period, on February 13 and on March 30.

It was only when the apex bank decided to hold the rates steady in its April meeting, and inflation started moving downwards from mid-April, that the market sentiment was assuaged and the index started heading northward.

The relatively stretched valuations of the Sensex vis-À-vis other global indices are another factor that played a major role in pegging the Sensex back.

The Sensex’s price earnings multiple of over 21 seems to have made external investors prefer markets such as Korea, Hong Kong and Singapore due to their relative under-valuation.

A major factor that aided the Sensex recovery was the influx of funds from overseas into the Indian markets post-March 2007.

The FIIs’ net inflow into India stood at $2.5 billion in April and May this year.

This liquidity helped the markets to tide over inflation and interest rates related woes.

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