At first glance, an index that tracks thirty large companies on another continent seems irrelevant to a salaried investor in Chandigarh or Coimbatore. Yet the INDEXDJX DJI has long served as a barometer for global risk appetite, and its swings are often echoed in emerging markets. Likewise, the KOSPI reflects the health of export-driven Asian manufacturing and technology, sectors that compete and cooperate with Indian industry. Watching such benchmarks is less about speculation and more about understanding the wider financial climate in which Indian companies operate.
The Interconnected Nature of Modern Capital
Your money travels across borders by a few keystrokes. International fund managers deal in billions, diversifying across scores of markets – and shifting a portion of their assets between markets depending on the valuation, growth trajectories and risk parameters. When their situation deteriorates at home, such managers may pare exposure to emerging markets (such as India) to raise funds or balance their portfolios
So Indian funds sometimes fall on a positive set of news out of India. Such events are triggered by happenings elsewhere; it becomes important to spot the connection. Doing this helps separate the wheat from chaff, as an unsuspecting investor might believe an abnormally large earnings season to be a precursor to positive index performance
The reason for this correlation lies in some rather basic economic linkages
That affect electronics assembly units, auto makers and software exports and sundry other Indian industries that buy from or sell into the global supply chain
An improving global stock market benchmark – typically representative of large-cap stocks – indicates higher capital expenditure budgets on the part of multinational corporations, which could translate into more contracts for Indian vendors. Prolonged weakness in such indices is a harbinger of belt-tightening and reduced capital outlays. Glimpsing such a trend helps an investor temper their own expectations from certain sectors, preparing them for some disappointments.
Using global benchmarks for relative valuation is an instructive exercise.
When Indian stocks trade at a premium to their global counterparts, it is necessary for an investor to ask if the outperformance is justified. If such a disparity were to compress, Indian stocks would appear to be on a discount. There is no magic in such relative valuation metrics, merely illumination – they help put a price tag on the fair value of Indian stocks. It is equally informative to compare the drawdowns and recovery of different indices. The ability of some indices to withstand a crisis and bounce back from a steep correction is useful information for an investor contemplating a similar risk-reward ratio on other indices. A lower dependence on exports is one reason why the Indian indices have fared better in some instances of global recession – a parameter that is by no means a constant.
All of this is beside the point unless a method is developed to cut through the noise. Here is where one begins to examine the signals on offer. Any reasonably reputed financial news portal and the websites of exchanges and brokers carry a wrap-up of the previous day’s closing numbers along with some basic commentary. This is enough reading for any individual investor trying to grasp the broad narrative
Of more value is developing a framework to understand what drives these numbers. A useful approach involves questioning every development – not just focussing on what happened but also on its implications insofar as holdings are concerned. If the impact turns out to be nil on one’s portfolio, the next item can be examined with a cooler head. Rumours and unsolicited advice on social media can safely be ignored.
A long-term investor seeking to retire in twenty years should have little reason to worry about business in distant geographies, no matter how compelling the narrative of an imminent crisis. The focus for such a person must remain on being invested rather than speculating, accumulating wealth rather than taking risks which need not be taken. Distant markets and their indices, whatever their value as an analytical tool, are best left to professionals to trade while ordinary investors conserve their resources for opportunities closer to home that have stood the test of time