Indian market's dependence on the US market

Indian Market & its dependence on the US market

September 26, 20202:50 pm
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During the March 2020 crash of Indian market, I was amazed by how our markets move in sync with the US market. I assume it would be the same for other country’s indices as well. I was curious to observe this historically and understand why this happens.

Movement of BSE Small cap index & DJIA Small cap index

To begin with our stock exchanges really lack data. Both NSE & BSE do not have small cap data prior to 2017. For BSE, I could get it only from December 2017.

I am sure if you are tracking the market since 2017/18, you would have noticed the sharp fall in the small cap index post the Feb 1st budget of 2018 when the Long term capital gains(LTCG) was levied at the rate of 10% from an earlier rate of 0% existing for the last 14 years.

But when you look at the US Small cap index movement during the period during the budget period(Fig.1), there was a similar fall but on a lesser extent due to the dampening impact of LTCG introduction in India.

Post that the US small cap index was at the similar levels for a long time. But even if there was little bit of fall in the US market, the Indian market fall heavily. 

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From my interpretation there could be 2 potential reason for that: 

1) FII Sell Off (FII still dictates the movement of our indices) 

2) Very poor economic condition in India (In slow down the larger peers do relatively better)

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3) Global economic cycle which began in 2013-14 peaked in 2018.

Indian market's dependence on the US market
Fig.1 Indices drop in the first week of February
Indian market's dependence on the US market
Fig 2. BSE Small Cap índex & DJIA Small cap index rebaed to 100
Indian market's dependence on the US market
DJIA Small Cap Index movement since 2014

Between the period of Dec 01, 2017 till Sept 2020, the small cap index is still down 33% where DJIA small cap index is up by 1%. As the economic cycle peaked, the smaller companies underperform due to lack of resources as well as relatively lower management capability/efficiency. 

Why so much sync?

Of the total world market capitalization, US has more than 55% market share. India’s market share is less than 1%. We really do not matter in the larger scheme of things. So whatever happens in the US impacts the entire world. And to some extent Chinese market.

But we can atleast try to understand where the market is headed to enhance our returns.

Indian market's dependence on the US market
DJIA Vs Sensex

Coming to the movement between the larges indices which are Dow Jones Industrial Average & Sensex, which are made up of larger companies, Sensex has performed better between the DJIA between Jan 2014 to 18th Sept 2020. While DJIA gained 68% during the period and Sensex gained 84%. 

But when compared to the same period taken as that of Small cap index, DJIA gained 18% compared to 15% gain by Sensex.

Conclusion

If you look at the daily market fluctuation between these 2 countries, there would be lesser correlation given the impact of local news flow but looking at the short to medium term movement of US market, it will give an idea where domestic market is headed. 

Resources

Where the next day’s US market is headed: Link

DJIA Small Cap index historical data: Link

BSE Small Cap Index historical data: Link

Link to my blog:Thoughts

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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