Home / Markets / Mark To Market /  Busted: The myth of India decoupling from global markets

The primary job of any stock-market bull who makes a living because you and I buy stocks is to sell a theory, any theory, irrespective of whether we are in a bull market, a bear market or caught somewhere in between, as in the case currently.

In a bull market, it is easy to sell when stock prices are going up. A bull just needs to keep saying the India growth story is alive and kicking, so come and buy stocks.

Detachment anyone
View Full Image
Detachment anyone

In a bear market, the India growth story is turned into hope. We are told that the growth story is still intact and what we are seeing is a temporary glitch, so come and buy stocks.

Of course, prospective investors may not always buy into the optimism of a bull, but then that’s the risk one carries in the business of selling hope.

You might also like

Why the wait for new trade policy just got longer

Why market is unimpressed by Torrent’s Curatio deal

Meet the risky investor: Equity Intelligence’s Porinju Veliyath

The most difficult sell is when the stock market is caught somewhere in between when an out-and-out bear market hasn’t yet arrived, but things aren’t looking good either. It is most difficult to talk one’s way out of such a market and ask people to buy stocks.

Nonetheless, bulls in the Indian stock market have passed the test with flying colours this time around. The theory they are selling is decoupling, which means the movement in Indian stock prices isn’t entirely correlated with the movement in American or other global stock markets. Indian stock prices haven’t fallen as much as in global markets, so come and buy stocks.

Indeed, at a surface level, which is just about enough to go out there and sell a theory, the data also suggests this. The BSE Sensex peaked on 18 October last year. Between then and 27 September, it has fallen by 7.5%.

During the same period, the Dow Jones Industrial Average (DJIA), America’s premier stock market index, which like the BSE Sensex, has 30 stocks, had fallen by a significantly higher 17.4%. Hence, we are being told that the Indian stocks have done much better than the American ones. In proper analyst speak, since 18 October, the Indian stocks have outperformed the American ones by a whopping 1,000 basis points. One basis point is 0.01%.

Simplistic theories work because they are easy to understand. The trouble is that just because something is easy to understand doesn’t make it right. Here is the catch. The Dow Jones Industrial Index consists of companies that report their earnings in dollar terms. In comparison, the BSE Sensex comprises companies that report their earnings in Indian rupees. Hence, any comparison between the two indices has to take this into account.

To set this right, we need to look at the performance of the BSE Dollex 30, which is the US dollar version of the BSE Sensex. As mentioned earlier, the BSE Sensex has fallen 7.5% from its October peak. How has the BSE Dollex 30 performed between then and 27 September? The index has fallen by 14.6%, closely tracking the 17.4% fall in the DJIA during the same period. This puts the decoupling theory to rest. Over the years, the returns generated by the BSE Dollex 30 have been significantly lower than the BSE Sensex as the rupee has lost value against the US dollar, given the higher inflation in India. This also shows that people in the business of managing other people’s money tend to miss out on details while espousing their theories, as their main job is to drum up business at the time, so that prospective investors invest in stocks directly or indirectly, through firms they work for. Finally, even if we give the decoupling theory some credibility, as the US Federal Reserve keeps raising interest rates, as it has said it will, the chance of a continued selloff by foreign institutional investors will also go up. That should finally put the decoupling theory to rest.

Elsewhere in Mint

In Opinion, Pranjul Bhandari does a pulse check on India’s economy before the RBI policy meet. Rahul Jacob writes on the secrets of Indonesia's startling economic rise. Akhil Gupta argues telecom dues might help reduce India’s fiscal deficit. Long Story reveals what nobody tells you before buying a house.

Know your inner investor Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Take the test
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout