Business Daily from THE HINDU group of publications
Tuesday, Aug 18, 2009
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Business Daily from THE HINDU group of publications Tuesday, Aug 18, 2009 ePaper | Mobile/PDA Version | Audio | Blogs |
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Lokeshwarri S.K. BL Research Bureau China and India are mentioned in the same breath by investors in the global financial community because the countries have similar economic growth trajectory. But this linkage is proving to be problematic to Indian equities in the last couple of weeks. The decline in Chinese stock prices is dragging its Indian counterpart lower. The Chinese benchmark, the Shanghai Composite Index, reversed lower on July 29 after a 90 per cent rally in 2009. The reversal was triggered by concerns that the Chinese central bank would cut lending in the second half of the year on fears that money spent on stimulating the economy was causing a bubble in stock and property markets. Monday’s sell-off in the Shanghai Composite Index has taken the tally for the recent decline to 17 per cent from its recent peak. Indian equities have also been under pressure since early August as inadequate monsoons and concern that stock prices are fairly valued at current levels have kept the lid on stock price movement. But apart from local factors influencing stock price movements, the decline in Chinese stock prices could also be impacting the local equity price movement. Indian equities enjoy a high correlation with Chinese stocks as overseas funds wishing to invest in economies that are still expanding at a decent pace find their way to both India and China. The movements of Sensex and the Shanghai Composite Index show a high positive correlation at 0.9 in 2008 and 2009. This linear relationship appears to have strengthened in the decline since January 2008. The high correlation of the two markets can be explained by their sharing a common conduit for receiving overseas funds. FII money coming into Indian and Chinese equities are mostly allocations made by BRIC and other emerging market funds. With Chinese equities turning southwards and worries that riskier assets (read emerging markets) have run ahead of fundamentals, the investments into these funds have reduced this month. According to global fund tracker EPFR Global, inflows into all emerging market equity funds declined 64 per cent last week. Net redemptions from Asian funds totalled $27 million in the week ended August 12. As global investors take a view on emerging markets or BRIC markets while investing as opposed to country-specific calls, exodus of funds from China would have its repercussion on Indian equities as well. More Stories on : Stock Markets | Stock Markets
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