Delhi-based Rajan Ahuja’s daily routine revolves around the three Ns. Around 8 am, as he is getting ready for office, he checks how the Nikkei is faring. By the time he reaches his workplace at 10 am, the Nifty has opened. When he returns home from work at 8 pm, it’s time to track the Nasdaq. “What happens in global markets can impact my stock investments just as factors like policy changes, profits or other corporate actions can,” says the 34-year-old manager.
Ahuja is among the millions of stock investors who have realised that global markets influence Indian markets and, therefore, the value of their investments. They are not wrong. But they aren’t completely right either. Being aware of global linkages is one thing. But understanding the extent to which these linkages impact Indian markets, the difference between the impact of various global markets and what all this means for their investments is even more relevant. To help investors cover this gap between awareness and understanding, MONEY TODAY compared the movements of five select global stock indices over the past 15 months with the movement of the Sensex to examine the presence and significance of correlation.
Correlation values range from -1 to +1, with 1 indicating the perfect correlation i.e. a 10% fall or rise in index A will cause 10% fall or rise in index B. The figures at the top of the page show the exact correlation values for all the five indices. The findings are interesting and instructive. While there is indeed a link between Indian and global markets, the correlation varies from strong to weak. Indian markets were found to be most strongly correlated with Hong Kong markets. On an average, a 10% rise (or fall) in the Hang Seng results in a 6.5% change in the Sensex. The second highest correlation was with the South Korean index Kospi.
NIKKEI - Japan
Market opens at: Indian time 5.30 am
0.47 Correlation - moderate
Moderate link between Sensex and Nikkei. Time lag plays its role. KOSPI - South Korea
Market opens at: Indian time 5.30 am
0.56 Correlation - moderate
Sensex tends to mirror Kospi, with a moderately strong correlation HANG SENG - HK
Market opens at: Indian time 7.30 am
0.65 Correlation - strong
Strongest correlation with the Indian markets. Opens just hours before BSE SENSEX - India
Market opens at: 10.00 am
When the Indian markets begin trading, Asian markets are still open. So the correlation plays out in real time, not after a time lag FTSE - UK
Market opens at: Indian time 12.30 pm
0.47 Correlation - moderate
Market with longest time lag, between its closing and Sensex's opening DJIA - US
Market opens at: Indian time 7.00 pm
0.48 correlation - moderate
Despite huge US investments in India, US and Indian markets have weak link |
Surprisingly, the linkages appear to be the weakest with the US (DJIA) and UK (FTSE) indices. This despite the overwhelming majority of FII investments in Indian stocks and FDI investments in the economy coming from the US. Then there are many heavyweight Indian stocks (including Infosys, HDFC Bank, ICICI Bank and Wipro) listed on US bourses. Any change in the value of these ADRs gets reflected in the Indian stock markets the next day.
To unravel the weak correlation with US further, we also studied the correlation between the US and Hong Kong markets, which turned out to be a reasonably strong 0.69. A quick implication is that the sentiments on the Indian markets are indeed linked with sentiments on the US market, but given the time lag, these linkages show up via the east Asian markets which have a shorter time lag with Indian markets.
As the clocks in the graphic above show, of the five markets studied, Hong Kong has the least time lag with Indian market and the strongest correlation. To factor in the time lag, we studied the correlation between opening price of the Sensex with the opening values of the Hong Kong and South Korean indices, since these two markets open before Indian markets. For the UK and US indices we correlated their previous day’s closing values with the Sensex’s opening values because these markets open after Indian markets.
But there’s a caveat. The correlation varies significantly with the period and duration of the study. A BSE study showed that the correlation between the Nasdaq and the Sensex was 0.78 in 1999-2000— much higher than our finding. We also studied the link between the Sensex and DJIA for 50 days before and after 8 January 2008. The correlation was 0.57 before January, but fell to 0.47 afterwards.
Specific values apart, the message is clear. Indian markets are certainly more globalised than before. And though local factors do influence the markets more, the Indian markets won’t keep rising even when US markets are either falling or stagnant.
This is one retrospective wisdom that investors who burnt their fingers in the post-January crash can keep in mind. Long-term investors needn’t worry about the correlation though. Over a period of time only economic fundamentals determine the state of the markets.
