For the first time in more than 15 years, the US and Indian markets have shown a strong divergence in trends, breaking a close correlation cycle seen over the years.
While the S&P 500 is down 19% from 4,796 (close of January 3, 2022), to 3,878 as of October end, Indian benchmark indices have stayed in the positive territory. The Nifty and the Sensex, which ended day one of the year at 17,625 and 59,183, respectively, gained over 2% to touch 18,012 and 60,746 by the end of October (See: The Great Indian Show).
In fact, the Nifty is up 4.19% from the close of 17354 (December 31, 2021) versus the November 2nd close of 18082. Similarly, the Sensex, over the same period, is up 4.55% from 58253 to 60906. In dollar terms, however, India is down 7% year till date. In comparison, the US market is down 19%.
The only occasion in the past when the US market fell and India gained was in CY18. That year, when the S&P 500 sank 7%, the Sensex and Nifty were up 7% and 4%, respectively. Besides, in all three instances – CY08, CY11 and CY15 -- when the US indices fell, Indian markets were down sharply (See: So far, so good).
What’s noteworthy is that the divergence comes on the back of a record fire sale of Indian stocks worth ₹1.68 lakh crore by foreign portfolio investors during the calendar year. As of October end, the value of FPI holding stood at ₹46.82 lakh crore based on June 2022 shareholding in 1,582 stocks.
Sunil Singhania, founder of Abakkus Asset Manager LLP, says: “When was the last time you had seen such a sharp divergence with the S&P 500 down and the Indian indices staying unchanged?”
What is interesting to note is that in 2008, when ₹52,987 crore was pulled out of Indian markets, the market had caved in by 55%. This time around though the outflow is 3.81 times that of 2008, the indices have shown a strong resilience.
The robust performance can also be attributed to the rise of retail money. The assets of the mutual fund industry have grown from ₹7.20 lakh crore as on September 30, 2012, to ₹38.42 lakh crore as on September 30, 2022, a more than five-fold increase over the past decade. What’s pertinent to note is that assets under systematic investment plans are around ₹6.39 lakh crore, which constitutes 16.63% of the overall AUM, indicating strong retail participation despite volatile markets.
A rising interest rate scenario in the US has created a risk-off investment climate, leading to the strengthening of the US dollar and assets denominated in the Greenback. This has prompted investors to dump EM equities, including India. The US Federal Reserve has hiked its interest rates to 3.75%-4% -- the highest since early 2008 – on the back of a fourth consecutive hike of 0.75 percentage points in November.
Ambareesh Baliga, an independent market expert and portfolio advisor, feels the FPIs will continue to head for the exit right through the calendar year. “While we may not see a panic selloff, foreign investors will continue to head back to the safety of the dollar as the Fed battles inflation,” says Baliga.
However, Singhania believes India remains the most preferred destination among foreign investors. Back from a trip to the US, Singhania says, “Global investors are increasingly talking of pulling out of China and investing in India. The question is more of “when” and not “whether” we should invest in India,” says Singhania.
