- Date : 01/10/2021
- Read: 9 mins
There is a famous saying about US stock markets: “When the US sneezes, the world catches a cold.” We explore the influence of the US and other international stock markets on the Indian stock market.
Since the beginning of this millennium, several major global events like the dot-com bust, terrorist attack on WTC, US subprime crisis, stimulus packages, European debt crisis, US presidential election, trade tariffs, COVID-19 pandemic, etc. have had a major impact on the US and international stock markets. Their effects also spilled over to the Indian stock market. This article will explore the causes of these events, how they affected the US and other international stock markets, and their influence on the Indian stock market.
1) The technology bubble burst of 2000
Technology is a big enabler, and IT companies have made life a lot easier for us with their innovative products and services. Due to this, listed technology companies have always enjoyed a premium valuation. But in 2000, greed took over and valuations of IT companies in the US and other global stock markets, including India, went through the roof. Finally, the overvaluation bubble burst, Nasdaq crashed, and many IT companies lost more than 50% of their valuation. Some even went bankrupt.
Indian IT companies derive a major chunk of their revenues from the US market. So, the Nasdaq crash had big repercussions on the Indian stock markets too. Share prices of listed IT companies such as Infosys, Wipro, etc., crashed, and the overall Sensex also plunged.
2) Terrorist attacks on the US
In 2001, just as the US market was recovering from the previous year’s dot-com collapse, it received another jolt in the form of a terrorist attack on the World Trade Center. While the dot-com fiasco mainly affected the IT industry, the WTC attack impacted the broader US economy. The terrorist attack led to a big fall in all major US indices – Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq.
The WTC attack jolted the entire global economy, with stock markets all over the world falling. The Indian stock market was just recovering from the 2000 dot-com bust, and it had to contend with yet another big blow in the form of the WTC terrorist attack.
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3) Low interest rates and easy liquidity-led boom
To pull the US economy from the slump caused due to the twin blows of the dot-com bust and the WTC terrorist attack, the US Federal Reserve (US Central Bank) adopted a loose monetary approach. The US Fed cut interest rates and provided the required liquidity to boost economic activity. But as the US Fed cut interest rates, other central banks across the world also adopted the loose monetary policy stance. The RBI too cut interest rates. The stance led to a global economic recovery, which boosted stock markets.
From 2002 to 2008, the US stock markets and other global stock markets saw one of the best bull markets. Sensex and Nifty also thrived during this period.
4) High-interest rates leading to crash: Subprime crisis
There were two phases during 2002-2008 when the stock markets worldwide saw one of the best bull markets. During the first phase, global central banks cut interest rates, which helped economic recovery. The low interest rates also led to a real estate boom across the world, including the US and India.
During the second phase, inflation started rising, and many economies started overheating. As a result, global central banks started tightening liquidity and increasing interest rates. For some time, the increasing interest rates were absorbed. But as interest rates kept rising further, many people in the US could not pay the high EMIs and, as a result, started defaulting on their mortgages, education loans, auto loans, business loans, etc.
This led to the subprime crisis, which started with real estate and then spread to other sectors of the US economy. Many US banks, insurance companies, hedge funds, and other financial institutions went bankrupt during this crisis. The US stock markets crashed. In other countries too, a lot of banks and other financial institutions went bankrupt. India was not spared either.
The US, India, and many other global economies had to once again resort to a loose monetary and fiscal policy to pull themselves out of one of the biggest recessions. The governments of many countries, including the US and India, had to come out with bailout/stimulus packages, after which the economies and stock markets started recovering once again.
5) High debt and sovereign credit rating downgrades
After the subprime crisis, from 2009 to 2012, due to the loose monetary and fiscal policy (bailout packages), the debt burden of many governments increased. It sowed the seeds for the next crisis in the form of the European debt crisis. The governments of some European countries (Greece, Portugal, Italy, Ireland, Spain, etc.) could not service their debt and were on the verge of sovereign default.
During this time, matters were aggravated further with political instability as some governments of these troubled European economies fell. There was fear that the European Union will break up. Credit rating agencies downgraded the sovereign credit ratings of some of these European countries. All this led to panic across global stock markets, and there was a sell-off. The global sell-off induced by Europe had an impact on the US and Indian stock markets.
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6) US Politics – Presidential Elections
Donald Trump was one of the nominees for the US Presidential Election in 2016. Many people did not like the speeches he made during his election campaigns. It was feared that if he became the US President, it would not augur well for the US and the global economy. The market’s fears came true when Donald Trump won the US Presidential Election in 2016 and became the US President. As a result, there was a fall in the US stock markets and global stock markets, including India. But the correction was short-lived, and over time, markets recovered.
7) Trump’s trade tariffs wars
After Trump became the US President, he started implementing the measures he spoke about during his election campaign rallies. He started a trade tariff war against China. He made some changes to the US visa policies that affected Indian IT professionals travelling to the US. He introduced protectionist measures that made Indian companies operating in the US to recruit local talent, increasing operating costs for Indian companies. He withdrew the preferential trade status for India under GSP (General Scheme of Preferences) and threatened India with trade tariffs.
All the above trade tariffs and protectionist measures started unnerving the US stock markets, and they went through a bout of correction. Similarly, the Chinese and Indian stock markets affected by the trade tariffs also went through a correction.
8) The COVID-19 pandemic
The coronavirus that originated in China in 2019 hit the global economy hard in 2020. As the virus started spreading to countries, one by one, many nations went into lockdown. It hit global trade in a big way. This lead to a big crash in global markets in March-April 2020. All US major indices crashed. Sensex and Nifty also crashed by around 50% as India went into one of the severest national lockdowns.
Related: Important things to know before investing in the stock market
9) Global fund flows – Stimulus packages
Central banks and governments across the globe have announced stimulus packages to pull their economies out of the impact of the pandemic and the resulting lockdowns. Over time, as the lockdowns eased, vaccinations accelerated, and stimulus packages started bearing fruit, the global economy started recovering. US stock markets regained lost ground. As the vaccination program started gaining pace in India and more and more industries were unlocked, the markets recovered their losses by end-2020. Eventually, the Indian markets went on to reach new highs in 2021. Indian stock markets also benefited from some US stimulus money getting invested by US investors in India.
10) Inflation and rise of US Treasury yields
The excess liquidity in the financial system started creating asset bubbles and inflation. Inflation in the US has started picking up and nearing the Fed target of 2%. Due to this, the US Treasury yields have gone up. The Dollar Index (a measure of the US dollar) has been strengthening. The US Federal Reserve has mentioned that they will start withdrawing excess liquidity from the financial system in the coming months and then start hiking interest rates.
The hike in interest rates will increase borrowing costs for US businesses. It will also make mortgages, auto loans, and education loans expensive for US individuals, reducing demand for goods and services. All this is likely to impact the US stock market and may lead to a correction.
In India also, inflation has been picking up. The RBI will also have to drain excess liquidity and hike interest rates sometime in the future, just like the US Federal Reserve. Also, the increase in US interest rates will make US treasuries attractive for investment and may lead to an outflow of some US investments from the Indian stock markets. It may lead to a correction in the Indian stock markets.
Apart from the above-discussed events, some other events like US employment data, crude oil prices and prices of other commodities, etc., also affect the US stock markets, Indian stock markets, and other global stock markets.
Last words
Today, we live in a globalised economy wherein we are more interconnected than ever before. Some people talk about India being isolated from global events and that we can decouple from such events. Well, the stock market reaction to all the above global events shows that neither we can isolate nor decouple ourselves from global events. Global events impact India also just like every other country. Post the global event, what matters is the Central Bank (RBI) and Central Government action on cushioning the impact of the global event and how soon we can recover from it.
As an investor, you need to take cognisance of the above global events and make your investment decisions accordingly. As and when such global events will unfold, they will impact Indian stock markets and have a bearing on your investment portfolio. You can be better prepared for such global shocks by adopting appropriate asset allocation to various asset classes such as equity, debt, gold, real estate, etc. Within an asset class like equity, you should further diversify by having exposure to large, mid, and small-caps.
