There have been two big themes that affected investors all over the world in the last month or so.

One of them is whether the credit crisis in the mature economies would affect liquidity and, if so, whether the US Federal Reserve or Fed would leap to the rescue. That question has since been settled.

The second is the weakness in the US economy and the impact that it would have on the rest of the world.

Sheer logic would dictate that, once the liquidity has been assured, thanks to the US rate cuts, it should flow to those areas and sectors least affected by the slowing US economy.

There have been innumerable analyses in recent weeks detailing how the Indian market is relatively insulated from both the credit crunch and a slowdown in US growth. Now that the BSE Sensex has scaled 17,000, with the fastest 1,500-point rise in this bull run, is it because investors are finally realizing the safe haven status of the Indian market?

It’s difficult to argue otherwise, with the Indian market being among the top gainers this month.

Among the MSCI indices, India has been one of the biggest gainers this month, being beaten only by China. As on 25 September, the MSCI India index was up 11.27% this month, far above the EM Asia index’s rise of 6.72%, or the 5.69% rise for all emerging markets .

The big question, of course, is why should the Chinese market go up, when it is certain to be affected by any US slowdown?

A recent Citigroup report points out that although exports to the US constitute 22% of China’s total exports and exports make up 36% of GDP, a US slowdown would result in expansionary policies that would keep growth high.

The report points out that, during the East Asian crisis, the Chinese authorities maintained 7.8% growth through expansionary policies.

It says that after gauging the net impact of a US recession and Chinese stimulation of the economy, growth in China will be 8.5%, closely followed by India’s 8.1%. That analysis also helps explain the sharp rise in commodity prices because “more investment-dependent Chinese and Asian growth could provide some support for commodity markets. This should be particularly so for commodities heavily used in investment projects and dominated by Chinese demand. Obvious examples would include steel, nickel, zinc, copper and aluminium."

In short, stock market performance in September shows that global investors are viewing both China and India as safe havens at a time when the risks of a US recession and a credit crunch have risen.

Software stocks

Software stocks got a reprieve on Wednesday, after RBI’s move to ease norms for overseas investments by Indian institutions.

The view the street seems to have taken is that resultant outflows would partly offset the huge capital inflows into the country and stem the rise in the rupee. Software stocks rose as much as 3.6% on a day the broad market was flat.

But it’s important to note, as Lehman Brothers’ Sonal Varma points out in a recent note, that even existing limits prescribed by RBI haven’t been fully exploited. Thus, the enhanced limits are unlikely to cause a sharp increase in capital outflows. Lehman has maintained its call of the rupee ending this year at 39 and the next year at 36.

That may make the jump in IT stocks look premature, but the markets can almost be excused for the over-reaction.

NSE’s CNX IT index has underperformed the market by 30% since April, primarily because of the continued appreciation in the rupee.

RBI’s announcement on Tuesday was one of the few signs that the rise in the rupee would abate, which explains why traders latched on to the news. But investors in IT stocks must be prepared for a rough ride at least till the end of the year, by which time it’ll be clear whether a slowdown in IT spend by US companies would make things even worse.

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