India’s correlation with global markets hits low

singapore — A shrinking correlation between financial markets in India and those in the rest of the world is one reason to buy its assets.

The weighted average correlation of India’s currency, bonds and stocks with those in other global economies fell to 0.32 last month, approaching a more than 10-year low of 0.29 set in November. The reading was as high as 0.68 in 2010, data compiled by Bloomberg show. Global investment managers say this divergence provides them with an asset class that can smooth out returns in their portfolios.

“India has seen less correlation to major global markets for a range of reasons such as the domestic nature of its economy, less sensitivity to the global cycle, and more recently, increased flows from local investors,” said Manraj Sekhon, chief investment officer at Franklin Templeton Emerging Markets Equity in Singapore. “India historically provides very useful ballast in global portfolios.” The disconnect is most pronounced in the bond market, where India’s 10-year yields have almost no correlation with a portfolio consisting of global sovereign debt.

When Donald Trump’s unexpected US election victory pushed up the yield on the Bloomberg Barclays Global Treasury Index by 23 basis points in November 2016, India’s 10-year yield fell 55 basis points. In Indonesia, whose bond market is often compared with India’s, the move was more closely aligned with the rest of the world as yields jumped 89 basis points.

“The idiosyncratic bond-market characteristics are driven largely by domestic investors where only local growth and inflation dynamics, policy-rate expectation and supply-demand dynamics matter,” said Lin Jing Leong, an investment manager at Aberdeen Standard Investments in Singapore. Other factors include the zero per cent weighting for rupee bonds in many global indexes and India’s restrictions on debt investment, she said.