Think global, invest local

I think ,while the significant returns in Indian equities in the last two years (2006 and 2007) may have lulled investors into believing that the Indian market was decoupled from rest of the world, its year-to-date meltdown in tandem with the global markets, has demolished the decoupling theory.

This suggests that even if most investors had managed to add substantial value to their equity portfolios without keeping tabs on global market events in the past, it may not be possible from here on.So investors need to keep a close watch on the global markets to predict the indian stock movements

I think , qn analysis of the correlation between monthly returns of MSCI India with MSCI’s country indices for China, the US, Japan and emerging markets over the past five years reveals that emerging markets (0.77) and China (0.69) exercise a stronger influence on Indian markets.

That most hedge funds and global investors apportion a chunk of their investments to emerging markets as a “basket”, and not specifically to India or China, may explain this high correlation. However, tracking the US market appears to be even more significant for investors keen to predict market direction.

My opinion is that in the last five years, the Indian mid-cap universe, as represented by the CNX Midcap shared a low correlation (less than 0.20) to world equities and emerging markets.Helped by larger fund flows into the domestic market, while the mid-cap stocks did revel in the bull run, they also suffered sharper reversals than their large-cap peers in the recent fall.

This is because, during market falls, investors tend to cash out of the small- and mid-cap stocks first, given the higher volatility that comes with such stocks. If it was one of top performers in the bull run, the Indian market has also been among the worst hit by the global equity meltdown. History shows that there is nothing new in this trend.