20 August 2010

Nifty : Decoupling Again?

For last few weeks we have been seeing extreme resilience in the Indian stock market when compared to western indices. Nifty has been outperforming even its front-line Asian peers like Japan, China and Hong Kong. Only Thailand, Indonesia and to some extent Singapore apart from India are avoiding the Global weakness. This has led to a lot of decoupling talks specially among the Asia specialists.

But you don't need to look far behind to see what happened to them last time around in late 2007; when this new concept was peaking and making headlines, we saw Indian as well as other major Asian markets showing strength, collapse.

No one knows whether we can ever decouple, but slowly and surely this is happening. The economy is far likely to decouple than stock market which has become one big global playground. Institutions in the hunt of return put money even in the weaker markets, hoping that excess liquidity will finally push the valuations. I have no doubt in Indian growth story but it is too early to think that we can have a bull market while others fear about economy.

We can easily see that the latest leg of rally has totally been fueled by FIIs which I guess is due to a substantial re-allocation of funds. If the fear of double dip, deflation etc recedes I am sure there will be lot of money moving back to those markets which have fallen. And if we really get into trouble, God save our stock market. So either case I don't feel we can expect much return from the markets from here on, though we can keep drifting higher as liquidity is ample. But remember liquidity is never there when it is most required, recall early 2009.

Above is the chart of ratio between Nifty and S&P 500. Note that its at an all time high, higher than it was during 2008 bull run. We can expect mean reversion possible very soon, which if happens would be smaller market following the larger one, rather than the opposite. I would expect a reversion to 50day moving average  on the cards pretty soon, which at current level of S&P 500 would mean (4.65*1070) is very close to 5000!
If the SPX falls more the lower the target!


Post a Comment