May 7, 2018

The Curious Case Of India’s Beta

Beta is a measure of systematic or market-related risks, i.e., risks that cannot be diversified away. Systematic risks are caused by socioeconomic and political events that affect the returns of all stocks, and beta is an estimate of how the returns from a stock will move relative to the returns from the market.

Why Has India’s Beta Fallen? The Mathematical Response

Mathematically speaking, beta is the product of the correlation of returns between a stock (or India Index here) and the market (or Emerging Markets Index, in this example) and the relative volatility of the stock’s returns to market returns. The striking feature of the 37 percent collapse in India’s beta since December 2014 is that it has been led by a fall in India’s relative volatility to emerging markets rather than its return correlations. Simply put, this means that emerging market performance-related impact on India is intact and, in fact, slightly higher in recent months. However, the portion of beta driven by non-emerging market performance-related impact (i.e., India’s own idiosyncrasies) is down significantly. Indeed, the relative volatility is 1.8 standard deviations below average and at its lowest level ever.

Where Is The Idiosyncratic India?

Thus, price action (i.e., beta) suggests that the India idiosyncratic story is at its weakest in history and India’s returns are being driven largely by emerging market factors. Developments of the past four years suggest that India’s distinctiveness versus emerging markets should have risen and not fallen. Indeed, India’s macro stability aided by positive real rates and fiscal consolidation, and change in funding mix of the external deficit from portfolio flows to direct investments is at its best in decades. Also, the demand for equities has shifted from foreigners to domestic sources, which again is a factor that should raise relative volatility. Why is the relative volatility down so much?

Why Has India’s Beta Fallen? The Fundamental Matrix


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