Subprime Ruling the Markets! Some Correlations between Hang Seng and BSE Sensex

The markets continued their worst trends in recent times when the BSE plunged again by 10% after which trade was halted for 1 hr. The stock market bloodbath continued throughout Asia-pacific markets on global financial crisis and concerns of a severe credit crunch should the Fed and other Central banks come up with rescue efforts. In BSE, 10% market wide circuit filters were applied and trading halted temporarily.

Should the market bounce from here, one could expect a rise of 1200 points or more to make up for the investors loss on two accounts of subsequent tumbling. Volatility has taken control absolutely in the markets and overvaluation in the Indian equity market paid off, similar to other emerging markets like Hang Seng(Hong Kong). Hang Seng (lost 5.5%) and BSE (lost 7%) as both saw the worst times and both were down nearly by similar points, showing how correlations took part in these markets.

Both the markets have a high market cap/GDP ratio, and anything above 100% is a sign that the particular market might be overvalued. India's BSE m-cap/GDP ratio touched 173% in Dec 2007, well above comfort zone of 100%, according to Economic Times, and the prevailing recent events have brought down the overall market capitalization to Rs. 58, 73,000. Markets like Hong Kong, Singapore have ratios well over 200%, considered to be too overvalued.

It was during the dot.com era that US markets had a ratio of more than 150%, well above its average of 50%, and the same got corrected in 2001 dot.com burst that brought down the m-cap/GDP ratio by 63%, according to Economics Times Research. So, it might be concluded that this particular ratio might have played some roles in market corrections.

In BSE, the downfall was aggravated when margin calls were triggered. There was heavy distress selling on part of some brokers to cover off the positions. According to Duetshe bank, 'liquidity shortage and oversupply of stocks in some sectors' might have been the catalytic factor, besides the US economic slowdown.

FII's and retail investors lost around 16% in BSE and liquidity crisis, panic selling and FII pullouts replaced the once calm and most profiting exchange that saw a bull run for the last 4 months. In October 2007, the market fell 10% and trading was halted due to the participatory notes effect, and in May 2006, the marked dipped by more than 10%.

It seems that BSE Sensex is having a correction every year since 2006 till present. On the three above occasions, markets plummeted by 10% causing a trading halt. It seems that the volatility has increased in recent times and international markets have become more correlated, and a chance of decoupling effect seems to be remote.

Right Horizons Desk

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