An informal review of world markets reveals that although the real arena of sub prime
mortgage crisis is the US
market
it is the Japanese and Indian markets which are more affected.
Sub prime loans carry higher interest rates than standard
mortgage loans and are granted to applicants with less-than-top-quality credit ratings. In US the sub prime housing loan defaults commenced in late 2006 and grew sharply in 2007. This caused several major sub-prime mortgage lenders to close down or declare bankruptcy. This resulted in a general
market downtrend and negative sentiment.
Despite claims of negligible indirect effect on distant/ emerging markets, the Nikkei fell by 12.41% and Sensex by10.13% in one month; during the same period the Dow Jones Index fell by only 5.40%. The other adversely markets affected include Taiwan, Korea and Thailand. Only China despite its large US exposure has managed a positive 22% gain. I
India receives sizeable FII inflows ―this includes hedge funds. While the influence of hedge funds on stock markets is unclear, frequently, hedge funds owing to their over-leveraged positions have lead to liquidity. When large-sized hedge funds (with exposure to highly leveraged sub prime markets) start liquidating their holdings in emerging markets to make good their losses in a sinking sub prime market the reason why emerging markets correct more than the American Market becomes obvious. It was a fear-led, uninformed sell off by the foreign institutions. As a knock-on effect sub prime fears have been factored in by Indian markets
The Chinese markets on the other hand have a lock-in period for staying invested for the FIIs; Japan has fallen more on accounts of yen instabilities.