Stocks correct on global decline, finally!

28 July 2007

When financial markets surge or correct, the media usually relies on clichés to provide an explanation. The favorite line for every market fall is 'investors' flight to safety', which makes it appear as if investors were either completely oblivious to the risks or were surprised by some calamitous event.

In reality, most of these so called 'market crashes' are normal bouts of profit booking after sustained gains over many weeks or months. But such corrections, triggered by specific news flows or events, are swift and often exaggerated which make them appear very dramatic.

This week's correction is no different. Stocks were on a sustained upswing for many months, driven by a host of factors, ever since the last meaningful correction in February.

But, Indian markets had less of a fall than others this week. Better than expected quarterly numbers from some of the large-cap Indian companies helped limit the fall. MSCI India index lost 2.97 per cent for the week while the MSCI Emerging Markets index lost a massive 5.6 per cent in US dollars. To put this week's decline in perspective, the MSCI India index had returned nearly 21 per cent in dollars during the April-June period.

The relative better performance over the last two weeks has helped India to erase the gap with other markets. Returns on the MSCI India index at 21.37 per cent in dollars for this year are now marginally ahead of 20.94 per cent returned by MSCI Emerging Markets Index. Index returns in rupees for the year at 11.1 per cent continue to lag, because of rupee appreciation against the US dollar this year.