The Hindu Business Line : Sensex among few to trade at new high

Indian stocks have sharply outperformed major global markets since October, with the Sensex being one of the few indices globally to scale a new high in 2008.

The Sensex has been soaring merrily over the last three months even as other global markets have been weighed down by innumerable worries.

Recession

The other major global indices are trading between 10 per cent and 20 per cent below the highest levels recorded in 2007. Even last year’s high fliers, Shanghai Composite Index and Hang Seng, are more than 12 per cent below their 2007 peak.

Most global indices peaked in the second week of October with the re-surfacing of the sub-prime crisis. It was in this period that some of the world’s biggest banks and security houses such as UBS, Citigroup, Merrill Lynch and JP Morgan wrote off more than $90 billion in sub-prime related losses. That coupled with the fears of a recession in US economy kept equities subdued in November and December last year.

Stellar Moves

But investors in Indian markets have refused to participate in the sell-off in this period. Large-cap stocks have held on to their gains though they could not move much higher.

The small- and mid-cap stocks have livened up the proceedings with some stellar moves. The BSE small-cap index has gained more than 50 per cent since last October while the Sensex has advanced only 20 per cent.

This behaviour is unusual for the Indian markets, as empirical data suggests that Indian markets typically have higher beta (tendency to move with global indices) during market corrections. This behaviour of Indian markets over the last quarter appears to be a fall-out of the restrictions on FII participation through participatory notes by the Securities and Exchanges Board of India in October.

Directional call

Fresh issue of offshore derivative instruments (ODI) with derivatives as underlying was banned with effect from October 25, 2007. The existing ODIs on derivatives were given 18 months to unwind.

A good number of hedge funds and external investors, who could take a directional call on the Indian markets through ODI with derivatives as underlying, have been absent since October.

This has probably insulated the Indian market from the correction that is currently in progress in all the other equity markets, including Asia. However, domestic short-term investors have been cashing in on the artificial strength in the Indian markets by driving up the prices of stocks in the second and third tier.

The losers are going to be the novice retail investors who believe that the markets are going to continue in its present trajectory.

Stock markets tend to correct temporary imbalances created by regulatory action over a period. Till such time, however, the Indian stocks are set to bewilder everyone with unpredictable swings.

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