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How Global Indices Affect Indian Stock Markets

Nov 1, 2023

How Global Indices Affect Indian Stock Markets

Financial markets are global in nature. Like it or not, this is a reality of our globalised world.

Events in one corner of the world, can and will affect markets not only in that country but many others as well. Often the 'other' country is on the opposite hemisphere of the planet.

A good example of this is the ongoing stickiness in coffee prices. Despite a big fall in 2022, coffee prices in the global market have refused to go below US$ 140 per pound. This has been the case for over two years now.

The reason has been poor harvests in Brazil, the world's biggest coffee producer.

This is just one small example of how the interconnectedness of global markets has sent the price of your morning cup of coffee higher.

What about the stock market?

It's the same story here too. Global stock markets are deeply connected to each other. While their trading times may be different, market sentiment operates on a global basis. This is because billions of dollars flow across borders daily.

Sophisticated traders and investors keep an eye on important financial markets of the world. Often, they track these markets closely on a daily basis.

Why do they do this? It's because the movement of markets like the US Dow Jones and the Nasdaq have an impact on stock prices in most stock markets around the world.

This is true in the case of India too. The Indian stock market is affected by the short term and long term movements of global market indices. This includes stock market indices, currency movements, commodity prices, and bond prices.

Let's look at some of them...

#1 US Stock Markets

The Dow Jones Industrial Average (DJIA), S&P 500, and the Nasdaq are among the most widely tracked markets in the world.

It's said that if the US sneezes, the world catches a cold. This is true not only in economics but also in financial markets.

It's often the case that the US markets take a tumble and the next morning, markets in Asia open in the red. This is a regular occurrence.

However, it's important to keep in mind that in the long term there isn't a clear 1:1 corelation in this way. Stock markets around the world move based on the fundamental performance of the stocks in the respective indices as well as the flow of foreign funds into that market.

In this regard, the Indian market has done well. From 2003, the start of the last big bull market, till 2023, the Sensex has outperformed many global indices.

An investor who bought the Sensex for Rs 100 in July 2003, would have been sitting on Rs 1,297 in July 2023. This is a gain of about 13X in 20 years and an annualised return of 13.7%.

#3 The Nasdaq and Indian IT Stocks

Here there is some logical basis for comparison. Indian IT firms earn Most of their revenue from US firms. So it makes sense that their fortunes would be tied to those firms.

However, it's not so simple as tracking the Nasdaq daily and then taking a bet on you favourite IT stock. If that were all it took to make money, then every trader would get very rich very fast.

However, there is evidence that in the long term this relationship is important. Most US tech firms are listed on the Nasdaq. These businesses have strong links with the Indian IT sector. If US tech firms do well, it follows that Indian IT firms will too.

#3 GIFT Nifty

Formerly known as the SGX Nifty, it's a derivative index of the Nifty. It's a dollar denominated index that is based on the Nifty50 index.

It's moves have long been seen as a precursor to how the Indian markets will open. This is because traders can bet on how the Nifty will open before it actually does, as the GIFT Nifty opens for trade at 4.30 am.

However, it's important to know that even if the GIFT Nifty can give an idea as to how the Nifty will open, it is a derivative of the Nifty. Thus it cannot dictate the movement of the Nifty.

#4 The Dollar Index

This is a perennially important index that impacts stock prices around the world.

As the US dollar is the world's reserve currency, it's 'price' influences all other prices in the global economy. Thus if the dollar index rises, commodity prices as well as stock market indices of most countries, especially emerging markets, will be under pressure. The opposite is also true.

This is a fairly reliable indicator of stock price movements including the Indian stock market indices.

#5 Crude Oil

This is a very important commodity as far as the Indian stock market is concerned.

India imports more than 85% of its crude oil requirement. The global crude oil price is one of the biggest factors influencing India's fiscal and current account deficits, inflation, and the rupee.

For most Indian companies, crude oil or its derivatives is their biggest input cost. Thus the global crude oil market plays a big role in the margins and thus profits of these companies.

The sectors most impacted by crude oil prices in India are aviation, chemicals, and paints.

#6 The US Bond Market

Last but not least, we have the most important market of all, the US bond market.

The yield, i.e. the price of benchmark 10-year US government bond, is perhaps the most important number in global financial markets. It's tracked by everyone. It affects all other markets.

The US 10-year bond is considered to be the ultimate safe investment. As the US dollar is the world's reserve currency and the US government is not likely to default, the yield on this bond basically determines the price of every other asset in the world.

This is because in times of crisis or heightened fear in financial markets, investors rush to the safety of the US bond market. And the 10-year is the logical choice.

Also, it times of high inflation, the US 10-year bond yield rises as investors demand higher interest rates as compensation.

Thus when the risk-free interest rate rises, it puts a lot of pressure on all outer assets that are considered risky. This particularly affects stocks of emerging markets like India that are considered more risky by foreign investors than assets in their home country.

Conclusion

The global financial system is complex. In this article we have highlighted the main global financial indices to keep a track on.

There are many more connections. For example commodity prices affect the users of those commodities. FMCG firms are impacted by argi prices, metal firms are impacted by metal prices, and so on. It's very important for investors to b aware of these intermarket links.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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