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  • The Most Important Thing

    Published August 3, 2016 Total Comments : 1
    stallion asset| msci-eem

     Today I want to Share a Secret with you. Lately Markets have been in a strong up move and a lot of people ask me as to what i think about the direction of the market. To be honest, there are only a few people who i know who can predict the market but the best traders React rather than Predict. The Best Investors manage risk by taking a few chips off the table and entering again when valuations look reasonable.

     At Stallion Asset Office we don’t have a television. I read 4 Newspapers everyday between 6.30 am to 8.30am but i never see LIVE television. (I see videos of Buy Side Individuals online later). In Markets you have-to do the right thing and television forces you to do the Wrong, its not their fault, its ours. We human get influenced by Activity, Momentum and Figure of Authority.

     

    The Reason of this Blog is not to criticize television but to tell you that in the short term and the long term data suggest that there is only one Independent factor that you should track very Carefully but i guarantee you that you don’t track it yet . Believe me after reading this blog, it will change the way you think.Thesis – Most emerging markets move in tandem as all emerging markets are looking west for equity capital. You might have heard on media “FII are selling, it’s time to rush to the exit door” or “FII’s are waiting on the sidelines to see governments action, stay invested”-remarks such as these abound in the Indian Stock Market and are a reflection of the influence that foreign institutional investors have. These overseas investors are far from a homogeneous bunch and are a mix of foreign pension funds, insurance companies, mutual funds, hedge funds, exchange traded funds and so on. But they loom over the equity trading landscape in India through their holding of almost 24 per cent of the country’s market capitalization. More than a third of the daily turnover in the cash market and one-fifth of derivative turnover on the National Stock Exchange stems from FII transactions. Most of the reversal points in stock market in recent years have been accompanied by heavy buying or selling by this investor group. It has, therefore, become important for investors to understand the factors that drive the FII fund flows into our country to gauge the direction of the equity market. Lately a lot of FII investments coming into India are ETF’s. Vanguard FTSE emerging market ETF and ishares MSCI emerging market index funds are the largest players in emerging markets. These funds are liquidity driven and have a mandate for passively invest by taking only systematic risks. You will be surprised seeing 24 year history of MSCI India and MSCI EEM as both markets move in exactly the same direction. Does Indian inflation have an impact? NO. Do Interest rates have an impact? No. Did ex finance minister P.Chidambaram fuel nifty rally from 1000 to 6200? NO. ITS ONLY GLOBAL FLOW OF FUNDS which affect prices and non-domestic factors. 24 years of history has proven that the even in years of low technology in 1990, global markets very much interlinked.

     Here we use a sample of MSCI Emerging market and MSCI India to explain the hypothesis.What is MSCI Emerging market Index(MSCI EEM)?
     The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries*. With 836 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country

    msci

     

    Below is the 22 Year Chart of MSCI India & MSCI EEM in USD Terms.

    msci-eem

     

    Shocked? Surprised? Impressed?

    This is not a 2-3 Month Chart but a 24 year Chart of MSCI EEM and MSCI India. We in India worry so much about Rainfall, IIP and other things but actually its Global market which matter the most.

    The correlation between MSCI India and Emerging market for the last 10 years is 82.2% and MSCI Emerging market explains about 72% of total variation in MSCI India Returns. This gives a high degree of conviction that Fund-flow into emerging market effect returns to a large degree.

    msci-correlation
    Lately the Correlation has decreased a little in last 1 year as China’s Weight is 25% and the Shanghai Composite has been Very very volatile.Conclusion – The Nifty (USD) pattern has been similar to that to the MSCI EEM for last 24 years since 1992 (after FII investments were allowed). Lately there is some distortion due to china as its weight is 25% but even after that the Standard deviation of 12 month moving correlation average is 21% in last 10 years.
    We at Stallion Asset Believe the Market are a Factor of Flow of funds and domestic factors have little Influence on it. Domestic Factors have huge influence on the Sectors that will do well. We are Stallion use a lot of evidence based analysis because we strive to be the best advisory company in the Country. We love doing things which are not written in books, not told in the media but we know them well. I hope you liked this secret and will track MSCI EEM from today.
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