Emerging markets may not have decoupled completely from the US, if the recent US induced correction is anything to go by. If there's one shining star for this decoupling theory though, it has to be India. Our market, so far at least, has been like a rock in the face of global turbulence. The numbers speak for themselves.
As the Dow collapsed from 14000 to under 13000, it dragged down most of Asia with it. China is down 15 per cent from it's recent highs, Hong Kong 17 per cent, Taiwan 15 per cent and Korea 15 per cent. The MSCI Asia index is down 11 per cent. The Sensex is down less than 3 per cent from recent highs. Not to mention the fact that the Sensex has been the dog in the Indian market over the last month, it's the midcaps which have been the biggest gainers. A broader market index of Indian stocks has probably outperformed it's Asian peers by an even wider margin.
So is this strength fundamental or technical? A bit of both. For India, the US matters more for liquidity flows than the economy itself. Most investors recognise that Indian economic dependence on the US is perhaps the least. From a stock market perspective the sectors which could potentially be hurt, like IT, have already been battered to pulp. The bad news is in the price. The fear is that FII flows dry up or reverse if the US goes into a recession. You could argue both ways on that. India looks better in comparison, even so , the fact that it hasn't participated at all in an overall emerging market correction, is a bit surprising.
There may be a technical element to it. The absence of large ticket FII selling on account of the P note situation and the elevated interest and participation of local traders this month have both been contributing factors to this outperformance. It is equally possible that Indian HNIs and operators are thinking smart. They may feel that FIIs will come back post registration in a few weeks to buy Indian stocks again and that the US Fed will inevitably cut rates to bail out the stock market, leading to the end of this Emerging market correction. So this may not be the time to panic, rather to fatten the calf. Not an unreasonable hypothesis.
After it's recent outperformance, India's relative valuations do look a bit stretched. One of two things will happen. Either India is breaking out of the pack and emerging as an asset class of it's own, driven by unique domestic fundamentals and strong investor appetite or it will correct to catch up with it's regional peers sooner or later. The first scenario may seem presumptuous and wishful, but it isn't impossible. We will find out as we go along.