When the Dow Jones Industrial Average tumbled 4.3% on Thursday, August 4 (Friday night in India), it set the alarm bells ringing among traders and fund managers here who were looking to unwind over the weekend. Knowing how closely markets around the globe are linked, a bloodbath in key Asia-Pacific indices, including India, seemed imminent on Monday. And so it came to pass.
Last Monday?s mayhem has only reinforced what traders knew all along ? that our equity market has been mirroring global cues much more closely in the past three years. Sample this: While our benchmark indices tanked in sync with other global indices in the aftermath of the Lehman Brothers collapse in 2008, they rallied in lockstep with their global counterparts when the first round of US stimulus was announced in 2009. Again, in 2010, our markets slumped off and on following negative news flow from some European nations.
?Our markets are now driven by global macro,? observes Tridib Pathak, director, equities at IDFC Asset Management. Pathak believes that over the past three years, all asset classes have increasingly become a function of the global macro situation and, more importantly, of the US Fed?s actions: ?The tipping point was the global financial crisis of 2008.?
Unsurprisingly, staying clued in to the developments in the global markets and analysing trends in the global economy has become the need of the hour. ?Fund managers are now increasingly spending more time to understand the global macro,? says Shankar Sharma, vice chairman & joint MD, First Global. According to Saurabh Mukherjea, head of equities at Ambit Capital, spending about half an hour each day tracking global markets has become a necessity: ?Today, fund managers could be spending nearly a third to a quarter of their time tracking the global markets and global economy.?
And investment folks are definitely losing some sleep. It?s not unusual to find bleary-eyed analysts and fund managers switching on their laptops early in the morning to catch up with the action in foreign markets. Many are hooked on to their Bloomberg terminals well over an hour before the Indian markets open.
The eagerness to analyse the performance of US markets (which close around 2.30 am IST) and track the happenings in major Asian markets like Singapore (opens at 6.30 am IST) is understandable as these indices often signal how domestic markets will open that day. European markets open at around 1.30 pm India time.
The time spent monitoring global events is likely to go up, say industry observers. More so if companies continue to turn ?global?. For instance, Tata Global Beverages (formerly Tata Tea) gets most of its sales from overseas and sales from Indian tea brands contributes just about 30% to its revenues, while Anglo-Dutch Unilever gets 49% of its turnover from the developing world.
But while it is easy to believe that our investment community is now tracking global news more closely, not everyone thinks this is a recent phenomenon. ?It?s been happening over the last 10 years,? insists Mukherjea. ?For example, the Fed?s decisions have always influenced the Indian market. So, I don?t think anything has changed structurally.?
According to Mukherjea, in the past 10 years, fluctuations in Chicago Board Options Exchange (CBOE) Volatility Index, called VIX, a widely used measure of market risk, has influenced investments by foreign institutional investors (FIIs). ?If VIX rises, the resulting risk aversion tends to reduce inflows into emerging markets like India which are perceived as risky,? he says. VIX and FII inflows have had an almost 70% correlation, Mukherjea says. That said, the need for factoring in global cues has certainly grown for those tracking cyclical sectors such as IT and commodities. Global fluctuations in crude prices reflect in Indian prices, affecting earnings of Indian companies dealing with oil. ?Changes in commodity prices impact company performances much more qualitatively now than it did earlier,? admits Pathak. Travelling overseas to get a first-hand feel of the companies there or to gauge the state of a nation would, then, be the next logical thing to do. After all, veteran investors such as Jim Rogers and Mark Mobius are known to travel extensively. But in India, except for a select few, most fund managers prefer to catch up on the essential global news sitting in the comfort of their local offices. And that is unlikely to change anytime soon, believe industry observers, unless India opts for capital account convertibility, which will greatly enhance the freedom to invest in foreign companies. Yet, if past experiences are anything to go by, our analysts and fund managers will be compelled to chant the global mantra with more gusto from now on. That might mean more globetrotting Indians ? and losing some more sleep!