X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Dow and Sensex: Does the correlation exist? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Feb 8, 2005

    Dow and Sensex: Does the correlation exist?

    Recently, we had conducted a poll on our website, asking readers whether they believed that the correlation between the US and Indian markets still persist. And the response has been mixed (as seen in the chart below). While the majority (52%) has voted that the correlation exists, 44% believe the contrary. While we would have favoured the former had this poll been taken 2 years back, the world has transformed into a changed place during these couple of years (2003 and 2004). Considering this and what we believe might happen in the future, we take sides with those who believe that the correlation 'does not' exist.

    Why we say so?

    The graph below will add more weight to our argument that the correlation amongst the two markets that was witnessed 2 years back, does not seem to exist anymore. The 'blue-box' indicates the period between April 2003 and January 2005. This is the time when the Indian stock markets zoomed up on account of factors like increased optimism of a faster economic growth and low lying interest rates in the US that led to foreign investors setting eyes on higher returns from the emerging markets, including India. And they were not left disappointed!

    The pull factor

    Investors round the globe have come to believe more in the Indian growth story and the sustenance of the same. Beginning the second half of 2003, the performance of the Indian corporate sector has been stellar as well and this has led to increased foreign investment activity in the Indian equity markets. After the record US$ 7 bn net inflows in 2003, the Indian equity markets 'devoured' another US$ 8 bn in 2004. Let us take a look at some reasons why India has emerged as a hot spot for foreign investment in the past two years.

    1. A vibrant and strong entrepreneurial culture seems to be emerging in India, which has become a sort of a competitive advantage for the country. Look at the services sector, which had led the country's GDP growth over the past several years.

    2. The offshore outsourcing story has benefited Indian corporations, especially from industries like software, pharma, auto and ancillaries and textiles. While cost arbitrage has been a major reason for the growth of the offshoring story, these industries now seem to be moving up the value chain by providing high-end services/products to clients. This is likely to help India sustain this competitive advantage.

    3. The strong financial sector continues to be the backbone of India. This is validated by the fact that despite the market crash on 'Black Monday' (May 17 2004), there was no payment crisis. The strength of the country's financial sector can also be gauged from the fact that it had shelved us from the crisis that had engulfed almost all Asian economies during 1997. This strong financial backbone, as a whole, has set a platform to support India's long-term objectives of growth with price stability.

    The push factor

    While the factors mentioned above have pulled the foreign investors towards the Indian capital markets, there has been one major push factor that has aided the process - the relatively low interest rates in the US. As the real interest rates in the US have remained in/near the negative for the past two years, investors have flocked emerging markets in search for higher returns. And they have not been left disappointed either. Now, when there are talks of the US Federal Reserve planning to raise rates at a faster rate, market participants in India have been apprehensive as this might dry up FII inflows. The 'fear factor' was amply witnessed a few days back when, post the release of the minutes of the Fed meeting which indicated that the interest rates are in for a faster rise in the US, the Indian markets came crashing down!

    Conclusion

    While the above-mentioned factors have helped the cause of the Indian markets in the past two years, the sustainability remains under question. And with the Fed expected to raise rates faster, who knows we might be in for a 'shock' on the FII front. However, that does not question the validity of the Indian growth story over the long-term.

    We would thus advice investors to stay invested in the Indian growth story for the long-term. But at the same time, investors should not ignore the developments in the global financial markets and corporate actions (like merger and acquisitions, Gillette and P&G being the latest) that could have a material impact on stock markets in India. If one believes that Foreign Institutional Investors (FIIs) are pumping money into India based on the premise that India is one of the fastest growing economies in the world, we would like to bring to investors notice that other emerging markets like Turkey and Peru grew at over 8% in the calendar year 2004!

    The Central Intelligence Agency of the US in the recently released report on National Intelligence Council' 2020 project, states that "the likely emergence of India and China as new major global players is similar to the advent of a united Germany in the 19th century and a powerful United States in the 20th century, and will transform the geopolitical landscape, with impacts potentially as dramatic as those in the previous two centuries." That should sum up the long-term India growth story. Stay invested in it!

     

     

    Equitymaster requests your view! Post a comment on "Dow and Sensex: Does the correlation exist?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 12:36 PM

    MARKET STATS