India’s economy has grown more integrated with the rest of the world over the past three decades, and its stock market reflects this. The Global Market may seem distant to a small investor in a tier-two city, yet its mood often decides whether the morning begins with optimism or nervousness. Traders regularly track SGX Nifty for a quick reading on that mood, and many retail participants now do the same. Understanding why these cues matter, and where their influence ends, can make you a more thoughtful investor.
India’s Growing Connection to the World
Foreign investors comprise a substantial portion of the free-float market cap of Indian companies. Accordingly, their decision to increase or decrease their allocation to India impacts prices. These investors make their decision based on returns available in other markets, volatility in currency rates and the overall risk perception of emerging markets as a group.
India’s trade linkages amplify the impact of overseas developments. As most of our crude oil is imported, any change in oil prices impacts inflation, fiscal deficit and the value of the rupee. Software and services exports are dependent on overseas demand, while even some domestic sectors like automobiles and electronics have significant import content. Tracking these overnight developments is not an indulgence but a necessity.
Which Cues Deserve Attention
While there is no shortage of overseas developments that can impact Indian equities, there are a few key cues that deserve more attention. The interest rate decisions of major central banks, which impact emerging markets in general and India in particular, would certainly be one. Crude oil prices, which influence inflation and the fiscal deficit and large swings in bond yields, which impact equity valuation, also fall in this category. Currency movements, which impact the value of imports and exports, also deserve monitoring. A weakening rupee will impact some exporters and importers adversely. Finally, surprises in economic data emanating from other countries, like inflation or employment numbers, can impact interest rates and liquidity.
The Limits of Overseas Influence
As important as these developments are, one must realise that India’s domestic developments are often more important. Domestic institutional investors, comprising mainly of mutual funds, which have sizeable monthly systematic investments, have become important players who soak up large amounts of foreign selling. The domestic market has become significantly more resilient than it was two decades back.
There are several factors which determine the domestic scenario. Monsoon, fiscal deficit, government policies, elections, festive season demand, corporate results and regulations are some of these. While foreign events might set the tone for these developments, they frequently turn out to be overridden by domestic happenings. A weak opening due to overseas fears might be overturned by large domestic purchases in the afternoon, while a strong opening might give way to large selling on disappointing numbers of a major company.
For this reason, one should view overseas cues as context rather than command.
Practical Guidance for Different Investors
If you are investing through mutual funds and have a long-term outlook, most overseas developments would have been captured by your fund manager. Focus on asset allocation and cost rather than getting distracted by short-term developments.
If you are a direct investor in equities, learn which of your stocks are sensitive to overseas developments. If you have an exporter, its profitability would be affected by its overseas demand, while a paint manufacturer’s earnings are impacted by the price of crude. Understanding the connection helps you evaluate the impact of a development.
As an active trader, you can use overseas developments to set the risk-reward equation for the day. On days of heightened uncertainty, reduce position sizes and avoid chasing the first mover. Wait for the market to open up and take out the big guns.
Building Resilience for the Long Run
Since we cannot predict external events, the best course of action is to build resilience into our portfolios. Diversify across asset classes and within equities while maintaining adequate liquidity. Avoid leverage and build cash reserves to take advantage of bargain-hunting opportunities that market stress tends to create.
History has shown that such market stress tends to create bargain-hunting opportunities for investors who have the patience and conviction to stick to their long-term plans.