All is well in the Indian stock markets. A correlation analysis of the Sensex and another emerging market index against the Dow and the FTSE reveals that the eight-session-long fall in Indian equities that ended with a two-day massacre was a long-due correction that was purely technical in nature.
The Sensex and Brazilian Bovespa, representing emerging markets, plotted against the US’s Dow Jones and UK’s FTSE index, establishes that Indian markets are insulated from worries in the US. While the three indices moved in tandem from May-September 2007, the Sensex and the Bovespa broke out upward in September, the Dow and FTSE slipped into a lackluster spell.
“Sub-prime related issues re-surfaced in September last year and the Fed had cut rates then, which saw foreign funds pouring into emerging markets, including India. This is when the indices showed clear decoupling,” said Sandesh Kirkire, CEO of Kotak mutual fund.
Hence, the Sensex and the Bovespa kept marching up with interim drops, only to reflect growing concerns over the US economy. In fact, even as all major equity indices across the globe, including the Bovespa, began to fall from January 2008, Indian bulls stubbornly marched uphill on the back of a robust third-quarter showing from India Inc.
So, what went wrong? Nothing. No stock market can up indefinitely. Even in the pink of economic conditions, stock markets need to undergo selling after any substantial upward run for better price discovery in an overheated market, take a breather, consolidate, and resume on fresh legs. However, the Sensex, but for interim knee-jerk reactions to global sell-offs, had been rallying with foreign funds flocking Dalal Street.
Finally in January, when the real depth of the sub-prime shakeout came out in the open, several of these foreign funds that were badly hit by the bad loans issue had to sell Indian equities (at approximately 70 per cent profits) to offset much of what was washed away in the US, thus triggering a technically overdue correction. What aggravated the correction was the dried-up money flow in a market that had just finished pumping in multiple times money into the Rs 11,600-crore IPO of Reliance Power.
“This was a strong technical correction more than for any fundamental reason. Partly, it’s a compensatory correction, as global markets had been undergoing one for sometime now,” said Naresh Kothari, head of institutional equities of Edelweiss Capital.