…but still closely track emerging economy, Asian bourses

Indian stocks’ linkage to US equities has weakened in the first nine months of this year.

This is a departure from earlier years when Indian bourses took their cues from the US markets and price movement mimicked those of US stocks.

But the domestic stock prices are still closely tracking the movement in markets in other emerging, BRIC and Asian markets.

Weakening tie

It was common for traders in India to stay up all night to track the gyrations of the Dow Jones Industrial Average and the S&P 500 index. This was because the trading in Indian and other Asian markets were greatly influenced by the close in US markets.

Even through the trading session, market participants in India keep a close watch on the Dow and S&P futures to determine their trading strategy.

But this appears to be unnecessary, for the correlation coefficient (that measures how two securities or indices move in relation to each other) between the MSCI India index and MSCI US index has weakened considerably from 0.79 in 2011 to 0.49 this calendar. This measure averaged at 0.82 between 2008 and 2011. A measure of 1 indicates that the two indices are perfectly correlated or move in tandem while measure of -1 indicates that the indices move in opposite directions.

The reasons for this weakening link are not hard to find. Global investors have preferred US equity this year as growing risk of sovereign debt default by European nations such as Greece, Spain and Italy made them prefer the haven of dollar denominated assets.

The MSCI US Index has gained 8 per cent this year on improving economic growth and declining trend in unemployment rate. The only turbulent phase in US equity this calendar was in May when Greece was struggling to put together a coalition government.

In comparison, the Indian equity markets have had a volatile nine months with high inflation, slowing economic and corporate revenue growth and Government inaction in implementing policies pegging back stock price movement.

The dominance of domestic issues in influencing stock price movement could also account for the de-coupling of Indian and US equities.

Other emerging markets

Bourses in other emerging markets have also suffered on account of rising risk aversion this year. This has resulted in India continuing to have strong linkage with these markets. The correlation coefficient of MSCI India with MSCI BRIC index, MSCI Emerging market index and MSCI Asia ex-Japan index was around 0.9 this calendar.

This linkage is, however, down slightly from last calendar year. Indian equities’ correlation with other emerging, BRIC and Asian markets was around 0.94 in 2011.

(This article was published on September 29, 2012)
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