Indian stock market: Indian stock market: Has the pendulum swung from decoupling to recoupling?

On the decoupling debate, few days of brutal market action was enough to make a twist in the tale. The debate has now moved from decoupling to recoupling in matter of days for India. The death knell for decoupling debate came when Fed in its latest policy meeting turned more hawkish with its forecast for a much prolonged hikes in the coming months in its fight against inflation. Post that meeting, global equities slumped, treasury yields rallied and dollar index surged. The global slump did not spare the Indian markets. The Fed scare had shaved off about 4% from Nifty in just few trading sessions with serious collateral damage to the currency and Gsec yield. Indian Rupee breached the long-held support level of 80 to move near 82 while the ten year Gsec yield surged by over 15bps. With this, the decoupling debate has been put to rest.

Until this meeting, India stood out like an oasis in the desert with its markets moving up amid a global equity slump. That led to Indian markets out-performing major indices globally. In the period between early Aug and mid-Sep (till 16th Sep), Nifty was up by over 2% while the MSCI EM index was down by over 4.0%. That was a stunning out-performance of over 6%. Even against MSCI World index, which was down by over 4.9%, the out-performance was significant. Looking at another data point, from June lows, Nifty was up by over 11% (until mid Sep) while Dow Jones was marginally negative. All around, India was charting out its own course amid global slump.

What was happening?

Many had rushed to prematurely call this an age of “decoupling’ for India, rationalizing it on the ample ammunition coming from favorable geo-politics, tail-winds from global supply chain diversification, turn of profit cycle driven by domestic demand etc.

Down cycle or upcycle, it is usually the developed markets, esp. the US market that sets the tone and the Emerging Markets (EMs) follow the course earnestly. It is very unusual for any EM market to stand out and step out of this rhythm. This has been the case for India as well in many cycles. It is difficult for anyone to recollect any single cycle where it was otherwise. It was always one of tight coupling with what was happening in the overall EM basket. But this cycle looked different. Though it was tightly coupled in the initial part of the current down cycle, since Aug, Indian market seemed to have stepped out to chart its own path, at least until mid Aug.

Was this decoupling for real or will the markets soon recouple?

This was the question that was in many investors’ mind till last week. Now, turning the clock to end Sep, it is no longer a debate. Markets seemed to have given a decisive verdict to this question with Nifty catching up with the rest of the global markets in the slump.

What should investors do in these difficult times?

Investors need to keep a balanced perspective during these turbulent times for the markets. While India’s macro is a relative sweet-spot for global investors with an attractive growth cycle, stable forex reserves along with superior external debt profile (external dollar debt at 19.9% of the GDP with long-term papers constituting 80.4% of the overall external debt), in the short-term, it is difficult for any EM to stand out and shine given the global linkages and spill-over effects of Fed’s tightening. So, when the global macros is at a difficult spot, it is not easy for any major economy to decouple on a sustained basis.

From this perspective, it is prudent for investors to expect short-term volatility, though India might continue to stay as a relative sweet-spot for global investors for the medium term from political, geo-strategic and market perspective. What it assures is that once the short-term volatility is digested and weathered, India might come back to out-perform very strongly the global and emerging markets. Given this robust medium term outlook, Investors should use the short-term volatility and corrections if any to their advantage.

(The author,
ArunaGiri N, is the Founder CEO & Fund Manager, TrustLine Holdings Pvt Ltd)