One may argue that the period under consideration (one week) is just too short to draw any conclusions. Point taken - but it still does not take away from the fact that there is a fundamental equation between the two indices which needs to be understood.

In recent times NASDAQ, has become the "Mecca" of tech stocks world over. It is the ultimate destination for tech stocks and listing on NASDAQ is construed as a sign of the new economy stock "having arrived". It is also considered a benchmark for world market sentiment for the knowledge based industries. So it was not surprising that a suddenly "tech heavy" BSE should start behaving in a "Nasdaquesque" way.

In the last one year the TMT or the technology, Media, Telecom sector has notched up weightage of upto 40% plus, as compared to 25% plus earlier, in the BSE Sensex and close to 45-55% of the total market capitalization.(Total market cap calculated on the basis of top 200 companies). In addition to this is the fact that two infotech heavyweights, Infosys(INFY) and Satyam Infoway(SIFY) constituting over 20% plus of the Sensex‘s market capitalization are also listed on NASDAQ. So this brings about a direct correlation.

The above facts bring to light two things clearly - one is that yes, with tech heavy constitution common to both the indices, it is natural that they should move somewhat in tandem. And secondly, with actually common stocks being listed on both the exchange the relationship becomes even more direct.

But let us go a little deeper into the "Tech" constitution of the two indices. Whereas the Indian tech stocks are still in IT services with a concrete revenue and business model, the NASDAQ sentiment is usually hyped up for its dotcom companies, which as yet have to start earning net profits. Experts opine that "The Indian tech companies involved in IT services will continue to show robust revenue and profit growth." So really the type of tech stocks contributing to the sentiment of each index are very different in earning models and future growth. There in lies a major difference which should be understood totally. A one to one correlation or comparison is somewhat utopian, what NASDAQ - a bench mark of the sentiment of worldwide tech stocks - can indicate to some extent is just that - SENTIMENT. So most Indian fund managers do take their cue in the short term from NASDAQ, which they claim is the leading indicator for technology companies world wide. And as the markets worldover operate on sentiment, to that extent what happens in NASDAQ will be of importance to us not only here at the BSE but also in other exchanges world wide. "If NASDAQ falls, it is bound to set off a chain reaction across the globe. Moreover, as NASDAQ keeps setting trends, any stock exchange in the world will dance to the tunes of NASDAQ. " opine experts.

Also with more and more Indian heavyweights - whether tech, media or pharma, lining up for listing on the NASDAQ, this sentiment correlation will only get stronger but as of now the capitalization of the Indian tech stocks is miniscule as compared to the NASDAQ capitalization.

A study done on the correlation of Infosys on the NASDAQ and the domestic market found the correlation coefficient to be very low at 0.46. So as of now this factor has a negligible impact on the correlation between the two indices. Also other than sentiment, each exchange is characterized by its own set of demand supply equations, market makers, payment and settlement mechanisms and composition of stocks etc. This why perhaps that when NASDAQ seems to be brimming with optimism, in the wake of better than expected results of its dotcom boys like Yahoo, Amazon.com etc, the BSE is not even reacting to the superlative results of its tech heavies like Infosys and Satyam.

"The markets had already discounted the good results into the price of the scrips. Which is why the more or less expected results did not help move their market price. Also the fact that the operating profit margin in both the companies has shown a dip is a factor which has to be kept in mind", says a leading Delhi broker who prefers to remain unnamed.

The BSE sentiment has been badly hit by the recent Foreign Institutional Investors (FII) offloading and some rumblings of payment problems. These factors have somewhat eclipsed the good news on the Tech results front. The FII's have been sellers for almost the last two months. One reason, is a pick up in the neighboring markets like Malaysia, Japan etc. and also the fact that FII's follow international investing trends, which are contracting valuations and price earnings multiples in the Infotech sector. This is why most foreign funds are neutral on infotech and have decided to go overweight on consumer goods.

So in a market of tough decisions where there are no free lunches, the NASDAQ, northstar, is definitely a sentiment indicator and should be interpreted as just that.

Aru Srivastava