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Sensex and NASDAQ - A unique correlation

Apr 28, 2000

The Indian investors are facing a peculiar situation. The issue is pertaining to the valuation of technology stocks. Initially, investors and 'punters' set the NASDAQ as a benchmark to justify the high valuations of domestic technology stocks. Now that the NASDAQ has suffered a precipitous fall, reasoning has been turned on its head and the conclusion is that it may not be a good benchmark after all!


Let's focus on the movements on the NASDAQ and the BSE Sensex over the last couple of months. The chart reveals a very interesting trend. Both the Sensex and the NASDAQ logged in a fantastic performance during the October to February period. The trend on both the bourses was pretty much the same. However, the party now seems to be over, at least for now. Beginning March, both the Sensex and the NASDAQ took a turn for the worse. Infact, the indices are currently at levels recorded in November - December 1999.

There seems to be a level of correlation between the NASDAQ and the Sensex. One reason for this could be that after the recent reshuffle in the constituents of the Sensex, the weightage of technology stocks has increased dramatically to over 30% View constituents of the BSE Sensex . These stocks, which were once the darlings of the investors, are currently trading at atleast a 50% discount to their yearly highs (recorded earlier this year). The fall on the NASDAQ had taken its toll on the valuations of domestic technology stocks.

In the coming days (if the NASDAQ continues to remain volatile and southward bound), Indian investors and fund managers will do their utmost to distance the domestic markets from the NASDAQ. Whether investors will heed their advice cannot be said with certainty. But one thing is for sure, that if the NASDAQ were to rise, parallels would once again be drawn!

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