Even as it outperformed the Chinese market in 2011, the Indian market is once upon set to outdo its giant neighbour in 2012, maintaining the broader lead it has enjoyed for most part of the last decade.
Market observers expect this trend to sustain in the near-term arguing that fundamentally, India appear better positioned also as FIIs (foreign institutional investors) seem keen to increase their weightage on the Indian equities. However, few question this widening yield differentials between the two emerging markets reasoning that such decoupling may not sustain for long.
?It is more a question of rebalancing than decoupling. In 2011 India was the worst performing market, this year that spot is taken by China as foreign investors scout asset class with better prospects.? said a trader.
In the year so far, both Indian benchmarks, Nifty and Sensex, have gained about 20% to 22%. On the other hand, the Shanghai composite, 994- stock benchmark index of China, has fallen by 4.6%.
This is in stark contrast to the performance of these major indices in 2011; India?s benchmark indices lost nearly 25% and Shanghai composite declined by 22%. In the last five years since 2008, Indian equities have outdone that of China barring 2011. Not surprisingly, the correlation between the two markets in the period has dropped to 30%, a deviation from their long-term relationship that denoted a positive correlation of 72% since the last one decade.
However, traders believe that in case the volatility in the global markets increase significantly, the correlation may strengthen and in-turn may limit Indian market?s gains.
As per Shubham Agarwal, AVP, Motilal Oswal Securities, even if the Nifty manages to surpass its latest high (5815) in the near-term, the index is likely to come across a tough resistance near 5910 mark, based on the trading pattern of the index.
Agarwal predicts that following some global event that increases volatility across markets, correlations between various assets may become stronger. ?This could bring down the Indian market?s momentum and it may look for a steep correction to match the performance of its emerging market counterparts,? he added.
After a continuous decline between February and May, Indian equities gained momentum since early June as they traded at a deep discount to their historical averages. Government?s policy push on much coveted reform measures including diesel price hike and permission of FDI in retail and aviation segments further kindled investor interest. As a result, FIIs increased their exposure to India as they bought $5 billion worth of Indian stocks during the period, taking their year to date net purchase to $18 billion.
Conversely, China?s market performance has been eclipsed by concerns of hard lending also as the economic growth fail to show clear signs of revival.
While similar data on FII inflows is not available for China, estimates show healthy ETF inflow in the Chinese market even after its disappointing performance in the year so far. According to Kotak Institutional Equities, during September, China observed an ETF flow of $1.4 billion, with the 12-month flow totaling to about $4 billion.
However, the brokerage also observes that in three-months to August , allocations of various geographically focused funds have come off substantially for China while that of India have improved. For example, both, BRIC and Asia ex-Japan funds have reduced their allocations to China by nearly 200 basis points (bps) in September alone while their three-month allocations have declined by 125 bps and 25 bps, respectively. In Contrast, their provisions to India during August went up by 25 bps and that for the three-months went up by nearly 125 bps.