Two need not tango

Last Tuesday, when the BSE Sensitive Index crashed by almost 2,000 points in the very first hour of trading, Finance Minister P Chidambaram made the following statement to the press, "My advice to investors is to stay calm. The economy will grow at 9 per cent this year... the fundamentals are very, very strong. There is no reason to allow the worries of the western world to overwhelm us."

The statement completely reversed the popular saying in the stock market: "When the US sneezes, the entire world catches a cold."

For some time now, the theory of 'decoupling' was being aggressively promoted. That is, we are a strong economy; global shocks will not impact us much, and so on and so forth. But then, we do not live in an autarky either.

We export to other countries, our citizens work abroad, many Indian companies already derive a great chunk of their revenues from operations abroad and foreign institutional investors (FIIs) are quite aggressive in our stock markets. In other words, there are bound to be reactions to shocks from events around the world and definitely, the US.

Says Sujan Hazra, chief economist, Anand Rathi Securities, "Since the South East Asian crisis in the late 1990s, the difference in the growth rates between the developed nations and emerging economies has widened."

According to him, the emerging economies have typically been 'high growth-low inflation' stories. However, as far as the financial sector goes, he feels that the decoupling is yet to happen, especially in the short-term, as witnessed during the last week. And a little number crunching reflects exactly that.

In the last six months, the correlation co-efficient between the two markets is rather low. This ratio reflects how the performance of the US markets has impacted the Indian indices.

The S&P 500 and the Nifty have a low correlation of 0.048. Similarly, the Dow Jones and the Sensex also have a low correlation of 0.085.

On the other hand, over the last three years, the Dow Jones and Sensex have enjoyed a strong correlation of 0.90. Even the movements in S&P 500 and Nifty have been related by 0.87. Surely, there are some winds of change.

Most market players are of the opinion that though India might be less impacted due to a US recession, the negative sentiment there could adversely impact our markets on a day-to-day basis. "Though empirical data may reflect that there has been some decoupling, sentiment plays a bigger role on a day-to-day basis. Obviously a crash in the US cannot be followed by an upswing in the domestic market," says Arun Kejriwal, investment advisor.

"Also, while there could be some divergence at present, the entire decoupling cannot be achieved overnight or perhaps ever," agrees Amitabh Chakraborty, head of equities, Religare Securities. But he is quick to add that a US recession is imminent, which is likely to lead to a fall in commodity prices and help in reducing the input cost for Indian companies.

In such a scenario, the main question is how should an investor be looking at the Indian market?

For Kolkata-based retail investor Nirmal Bhotica, the solution is simple, "When I am trading on a daily basis, I have to take cues from the US markets. But for the stocks that I like as long-term investments, I buy them independent of international scenario."

Chakraborty adds, "Investors should try and get into frontline stocks and hold them for great returns."

Simple as it may sound, but for the long-term investor, it means picking good stocks and having a two to three year perspective for good returns. As Hazra puts it, "Over the next 12 to 18 months, it is likely that while the US market stays in a bearish phase, the Indian market continues to enjoy a positive run."

And that is great news for the Indian investor and the FM.