The Indian markets are now closest to their all-time high reached in July this year, among the best performance of markets everywhere leaving aside oddballs such as the Chinese markets. The Sensex is just 3.5% away from its all-time high of 15,869, while NSE’s Nifty and the S&P CNX 500 indices are 4% and 4.4% short, respectively. The markets’ recovery has a lot to do with the rise of 4.4% in the US markets since mid-August. Much of the Indian markets’ recovery happened after US stocks started rising. But it’s important to note that the US markets, represented by the S&P 500 are still 5.3% away from their highs. Besides, emerging markets in Asia, Latin America and West Asia are still about 8% off their highs.
While foreign institutional investors have been sellers across markets (including India), what has helped the Indian markets this time around is aggressive purchases by local institutions. According to data published by the Bombay Stock Exchange (BSE), domestic institutions, including mutual funds and insurance companies, offset three-fourths of the sales made by FIIs (foreign institutional investors) in the cash segment in August. Retail and HNI (high net-worth individual) traders were also net buyers, offsetting FII sales to the tune of 10% last month. In the futures segment, local players bought substantial amounts when FIIs pushed the sell button aggressively in mid-August. Despite their sales and falling prices in the second week of August, open interest in the futures market hardly fell.
The Indian markets are normally more volatile, rising at faster rates but also falling at rates higher than peers. But this time has been different—the Indonesian, Korean, Argentinian and Brazilian markets have been much more volatile. The Indian markets’ fall of 12% from their highs in July was the lowest amongst emerging markets.
During the crash in May 2006, domestic institutions led by mutual funds had been aggressive buyers but they couldn’t stem the slide in stock prices. Now, flows into equity schemes of mutual funds and insurance companies have gained much more in size and going by the data for July/August, they have done their part in providing some stability during volatile times.
Which sectors held out against the recent global sell-off? Were the sectors that did well in the domestic markets also the ones that stood up to the sell-off in global markets? Collating the information provided by the MSCI sectoral indices with that provided by the BSE sectoral indices provides some interesting perspectives.
Let’s start with the Bankex, which fell 1.1% last month. The MSCI Global index for banks was down 2.9%, while the MSCI Emerging Market Banks (index) fell 5%. That seems a bit counterintuitive, but some of the Chinese banks have been saddled with large losses by acquiring subprime loans. Also, most of the losses in the Western markets have been borne by investment banks and the MSCI index of global capital market players was down 5.4% in the month. The corresponding Emerging Markets index was down 11.7%. In India, although we don’t have an index for brokerages, several brokerage stocks have corrected far more than the market.
What about real estate? The BSE Realty index is down 2.9% in August, less than the MSCI Emerging Markets Realty index, down 5.1% or the MSCI World Realty index, down just 1.1%. Clearly, the worries about the US mortgage markets haven’t had much of an impact on global realty stocks.
The BSE Metals index is up 3.6% in August, which is rather strange because metal and mining stocks in the MSCI index are down 3.2% last month, while the MSCI Emerging Markets metals and mining index is down 0.5%. This is surprising because commodity stocks usually move together as metals prices are set internationally.
But it is the capital goods index that shows up the sharp difference between the Indian and other markets. The BSE Capital goods index went up 4.95% last month, while the MSCI capital goods world index was down 1.6% and the Emerging Markets Capital Goods index fell 2.57%. The divergent performance reflects the difference in economic outlook, especially the strength of the capex boom in India.
What about Information Technology (IT)? This is one sector where world software stocks have outperformed Indian stocks. The MSCI Global software index is up 0.997% in August, compared with a fall of 1.36% for the BSE IT index. Emerging market software stocks were down 3.6%.
Rather surprisingly, given the weakness of the auto sector in India, Indian auto stocks have outperformed their global peers. The BSE Auto index closed up 2.76% in August, compared with a huge fall of 9.3% for the MSCI Emerging Markets Auto index and a fall of 3.6% for global auto stocks in August.
The diversity in performance indicates that while the overall broad indices may rise and fall together, there’s a remarkable degree of variety at the sectoral level. In short, there’s still much to be gained by global diversification within sectors.
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