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    Further fall in key price ratio could trigger another selloff on D-Street

    Synopsis

    In the past one month, Indian equities underperformed the EM universe by 6%.

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    The price ratio of the MSCI EM index and MSCI world index has been indicating a bearish lower-top and lower-bottom pattern since 2011.
    It’s a sacrosanct point of reference. Breaching it could trigger a brutal sell-off. It is the price ratio of crucial indices that now holds the key to the health of Asia’s oldest stock market, with the nation of a billion-plus consumers enduring an unprecedented lockdown to help prevent the spread of Covid-19.

    The price-ratio of the MSCI EM index — a measure of the performance of developing nation equities in dollar terms to the MSCI World index (for developed nations) — stood at 0.46 on April 3. That’s perilously close to the lower-end of its consolidating range of 0.45-0.9. A breakout below this crucial range could trigger selling by Algo-traders, accentuating the pace of the decline that has caused indices to retreat a third from recent highs.

    The price ratio of the MSCI EM index and MSCI world index has been indicating a bearish lower-top and lower-bottom pattern since 2011. This reflects that the pressure on the EM equities would be more than its developed counterparts.

    BSE snip 6

    The pressure of break-out on either side for the MSCI EM index will have a more pronounced impact on the Indian equities, as the magnitude of redemption pressure of the global institutional investors will be accentuated. The price-ratio of the Nifty 50 index to the MSCI EM index is inching toward the lower-end of the consolidating range of 10.17-12.07. The intensive selling on March 24 resulted in the price-ratio dropping below 10.17. The sustenance of the price-ratio below 10 would increase the probability of it slipping toward the 9.2-9.25 range, and this could eventually expand India’s underperformance to the EMs.

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    In the past one month, Indian equities underperformed the EM universe by 6%. In that period, the EM index has underperformed the DM index by 160 basis points. Neeraj Agarwal, vice-president at Antique Broking, believes any break-out of consolidating range on either side would result in a further sharp movement of 10% in the direction of the break-out.

    Given the uncertainty over Covid-19, the odds appear rather short on a downward journey.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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