Understanding Why Correlation Between Markets Can Be Misleading
An interesting trend has emerged from a long-term comparison of two major stock markets: India and Hong Kong. When we analyze the Nifty and the Hong Kong Index in US dollar terms over the past 18 years, we discover something surprising. From 2005 to 2020, both markets demonstrated a high correlation, meaning that when one market moved up or down, the other often followed suit. This similarity was so striking that it resembled a near-perfect match.
A Significant Shift in the Last Five Years
However, a dramatic change occurred after the COVID-19 pandemic. While both markets followed similar patterns for 13 years, the last five years have completely disrupted that trend. In US dollar terms, the Nifty has risen by nearly 292%, whereas the Hong Kong Index has only increased by about 40%. This sharp divergence highlights how quickly market behavior can change. What once seemed like a reliable pattern for over a decade has suddenly become unrecognizable.
Correlations Are Not Permanent
This situation is not merely a one-time anomaly. Similar patterns can be observed in sectors and individual stocks as well. Two companies in the same industry may move together for years, only to start performing very differently at some point. The same phenomenon can occur across entire sectors. Therefore, relying solely on past correlations to make investment decisions can be quite risky.
The Dangers of Relying on Past Patterns
Many investors assume that if one stock rises, a related stock should also rise. For instance, if Tata Steel performs well, people expect Steel Authority to follow suit. There is also a tendency to believe that if the Nifty has done well, the Hong Kong market should inevitably catch up. However, this assumption is flawed. There is no guarantee that correlations will continue, and relying on outdated relationships can lead to poor investment decisions, especially in a rapidly changing global landscape.
What’s Driving This Change?
Today’s world is vastly different from what it was just a few years ago. Geopolitical shifts, changing trade relationships, and differences in growth patterns have severed many old ties between markets. For example, India’s growth story may now be stronger than ever, while Hong Kong faces challenges due to global tensions. These developments illustrate that past relationships do not always serve as reliable indicators for the future.
Have you ever relied on past trends or correlations while investing? How did it turn out? Share your story in the comments below! If you found this blog helpful, don’t forget to SHARE it with your friends!
WeekendInvesting launches – The Momentum Podcast
This episode of THE MOMENTUM PODCAST features Manubhav, a third-generation real estate professional, sharing his unique journey navigating both worlds.
Discover:
✅ FROM PROPERTY TO PORTFOLIO: Manubhav’s transition from his family’s established real estate business to exploring equity investments.
✅ MARKET WISDOM: His candid experiences with market swings, including COVID-19’s impact on his SIPs, and lessons learned from F&O and smallcase.
✅ THE BIG COMPARISON: A fascinating look at real estate vs. equity returns, featuring real-world numbers from his family’s 40-year property investment.
✅ UNCOMMON INSIGHTS: Why gold is a family favorite and the surprising state of equity investing in smaller Indian towns.
