As US braces for stock market 'corrections', Indian investors wary

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Indian stock markets are not immune to global cues. In the five consecutive trading sessions till October 1, Sensex has lost 1300 points. The valuation premium of Indian equities compared with emerging market counterparts has risen to a decade high. According to Bloomberg data, the MSCI India index, a measure used by global fund managers to gauge the performance of Indian equities denominated in dollar terms, trades at 80% premium to the MSCI EM index, which represents the emerging market (EM) equities. It is much higher than the long-term average premium of 44%. Foreign Portfolio Investors have invested disproportionately higher allocations in Indian stock markets, compared to other emerging markets. The value of the foreign portfolio investors’ (FPI) holdings in the domestic equities reached a record $555 billion in 2020-21, a whopping $105 billion growth between September 2020 and March 2021, according to a report of Bank of America Securities. High valuations combined with high FPI investments can bring down the Indian stock markets, as and when Fed tapering begins.

Worsening matters, the month of October is expected to be even more volatile for the stock markets. Traditionally, the S&P 500 index had decreased 0.4% in October. This month has witnessed some of the biggest stock market crashes in US. Notable among them are the 1929’s Black Tuesday and Thursday, and the great crash of 1987, which occurred on Oct 19. On that particular day, the Dow had tanked more than 20% on a single trading session, making it debatably the worst single-day decline in history.

This October, we may not expect such big crashes, but certain things aren’t looking up for the stock market either. Concerns about a debt-ceiling breach by US, Fed moving- away from its accommodative policy, growing sovereign debt piles world-over, corporate defaults, asset price bubbles and China’s faltering economy are all weighing down on the minds of investors.

( V Venkateswara Rao is an alumnus of IIM, Ahmedabad and a retired corporate professional.)