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Global stock markets in action

Three recent news reports illustrate the impact of globalisation on stock markets

— PHOTO: AP

IN SHARP FOCUS: Investors check the stock prices at a securities company in Shanghai, China. Chinese stocks rebounded in volatile trading on June 5, following their sharpest one-day drop in three months as strong buying by institutions offset selling by retail investors.

ON JUNE 8 the stock markets ended the week on a sharply weaker note than at the start. The Sensex dropped 122 points and the Nifty 34.50 points. On June 4, the Sensex had closed at 14550. By the close of the week it was 500 points lower, its biggest drop in 12 weeks.

Indian investors are getting used to frequent gyrations in share prices. At the start of last week the Sensex seemed poised to scale new highs, possibly breach its all time record of 14723. On May 21, the Nifty set a new record when it touched 4260. It has since gone past that on several occasions. It closed the week at 4145.

Global influences

The past week's price movements seem to have been influenced largely by global developments. That again is not a new phenomenon but something that manifests itself at more frequent intervals. There are several reasons for this. Most important of all is the fact that Indian financial markets are getting integrated with the rest of the world. Foreign institutional investors have favoured Indian equity markets. Until the emergence of domestic financial institutions and mutual funds as big investors, the FIIs were by far the most dominant players in recent years.

It is not difficult to understand why the perspective of foreign investors in Indian equities or debt instruments will be global in character .In addition to India specific factors, they will have to reckon with those affecting other emerging markets similarly placed.

Again, the days of viewing emerging economies as watertight compartments might have already become passé except in a technical sense. Certainly when it comes to India and China with their strong economic growth stories, foreign investors of all hues are making a beeline. It is possible that but for regulatory and policy constraints as, for example, in the Indian gilts market, the flow of overseas funds could even become larger.

The Reserve Bank of India in its recent Report on Currency and Finance (2005-06) makes the point that Indian equity markets remain small in size when compared to advanced economies such as the U.K., Australia and Japan but are significantly bigger than many other emerging markets including Brazil and China. That would indicate, among others, that large fund flows to Indian stock markets would have the effect of boosting share prices and hence the indices almost instantaneously. Conversely the markets will fall in line with FII outflows.

All these must be familiar to even a casual investor. However, there is a strong case for better understanding other financial markets. Only then can there be a reasoned analysis of stock price movements within India as well as outside.

Interest rate fears

During last week (June 4 to June 8) there were at least three news reports that illustrate the influence of overseas factors on Indian stock prices. On Friday, not only the Indian benchmark indices but those of most other economies _ both advanced and emerging _ fell. This time it was the fear that the U.S. Federal Reserve might not cut its interest rates further that caused the downward drift. High bond yields in the U.S. have fuelled the belief that the benchmark rates will not be marked down.

It seems to be a question of emerging markets appraising the global interest rate scenario and arriving at the conclusion that a downward cycle is still some time away. (This argument is not new to India). The U.S. indices led the downward rally, which soon encompassed most markets.

Weak Chinese advices

The second news item concerned China, whose stock market (until June 4) had fallen by 16 per cent from its May 29 peak. Concerned that a bubble is emerging in the domestic stocks, the Chinese authorities have been contemplating measures to dampen the enthusiasm for stocks.

A hike in the securities trading tax has been one such measure. Yet since global investors too had come to the conclusion that Chinese stocks were overvalued, they took the recent declines there in their stride. To a large extent global indices did not react negatively to happenings in China.

The last item is from Standard and Poor's May global stock market review, which says that the Indian equity market has outperformed all markets, both emerging and developed, for three months. At 25.87 per cent, the Indian market grew faster than most emerging markets which posted average returns of 13.83 per cent and even China's 16.82 per cent. However, over May the Chinese and Mexican markets have outperformed India.

According to S&P, the performance of stock markets the world over has been nothing short of phenomenal (over the past 12 months). It is, therefore, good to see the Indian market figure right at the top at least over the past three months.

C. R. L. NARASIMHAN

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