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Message: Global cues move domestic markets
http://economictimes.indiatimes.com/ Global cues move domestic markets 24 May 2009, 0447 hrs IST, Kavita Sriram, ET Bureau
No country can isolate itself from global influences. A hike in oil prices, hiccups in the US or a war miles away can affect your returns
from the stock markets. The global recession was cited as the main reason when the Sensex crashed from its glorious high of 21,000 points. While the local news may have its bearing on the index movements, global influences have become overwhelming to reckon with. . The unemployment rate increased as outsourced jobs and exports took a beating.
economy
Foreign institutional investors (FIIs) have emerged crucial players in the domestic markets. FII buying pushes the index upwards. When FIIs panic and pull out in haste, the markets usually come tumbling down. And what dictates FII investment patterns ? FIIs are influenced by a host of global factors, events and crucial developments .
For instance, if returns on investments back home are not lucrative enough, FIIs pump more money into the much greener
emerging markets. On the contrary, they become jittery at the news of unfavourable developments or signs of instability. The election results saw a stable government elected to power. The FIIs regained confidence and pumped in money sending the Sensex on the largest single day rise witnessed by any index.
With the financial markets tightly interwoven across nations, there is a greater risk of crisis in one country snowballing across the global . A financial or monetary crisis can destabilise a market somewhere across the globe. The global recession has directly impacted India, China and exporters like Japan. The emerging market economies are the first to bear the brunt of a slowdown across the US and Europe.
When the global demand falls, the volume of exports of goods and services comes down. The result is that a particular industry or sector is badly hit. What ensues is an increase in the unemployment rate and a slump due to the reduced demand. Those going abroad for work will be faced with reduced job opportunities and lesser income levels. Foreign investors will become more cautious when investing in emerging markets that are more volatile. So, the direct impact of a global crisis is a fall in foreign direct investments (FDI).
Direct and indirect protectionist measures by developed nations have hurt emerging markets more seriously . This is bound to hurt countries like Bangladesh and Sri Lanka more severely as they rely heavily on the exports of manufactured goods. Apart from the realty sector, the tourism industry will be impacted by a global slowdown and reduced spending. The reduction in demand across US and European nations impacted IT, biotechnology and other export-oriented sectors that saw a steady erosion in profits
Domestic investors must track global developments, political events and market movements. This will help in deciphering the FII behaviour patterns to some extent. Signs of recovery elsewhere across the globe can infuse optimism in the domestic markets. The domestic stock markets and economy are tightly coupled and cannot be viewed in isolation. Hence, it is essential for investors to track performances of global markets and economies. Think global to invest locally.
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