In the current calendar year, there have been six instances of the benchmark S&P BSE Sensex losing more than 1,000 points in a single trading session. Interestingly, there have been an equal number of sessions when it gained over 1,000 points in a single day. And, a single-day fall or gain of high three digits has become the norm. Ask any market participant, and the one word on everyone’s mind is ‘volatility’. But is it that Indian markets have suddenly become overly volatile? Or are they simply reacting to the concerns that continue to plague the domestic- and also the other stock markets the world over?
Currently, the key concerns include a mix of macroeconomic and geopolitical factors. The Russia-Ukraine war was a surprise, to say the least, as most market participants—till a couple of months ago—were of the view that there would be a diplomatic escalation but never a full-blown war. The war couldn’t have come at a worse time as concerns related to the Covid-19 pandemic were just starting to abate. Meanwhile, the war has, in turn, pushed up commodity prices and, thereby, inflationary pressures on various economies, including India.
In the latest edition of the widely-followed Greed & Fear newsletter, Jefferies’ Christopher Wood has stated that while both China and India are facing issues, inflation is a bigger problem for India. “China currently has some problems, inflation is not one of them… Inflation, however, is becoming more of an issue in India where CPI has now been above the Reserve Bank of India’s threshold of 6 per cent for the past three months. CPI in March was 6.95 per cent YoY, the highest figure since October 2020,” stated the report while highlighting that RBI “needs to start tightening monetary policy”.
R. Venkataraman, Chairman of IIFL Securities, also believes that inflation is one of the major reasons for the Indian stock markets’ current behaviour. “The ongoing volatility is not attributable to one particular reason. One of the major reasons is that inflation is rising globally. The Russia-Ukraine war is showing no signs of settlement, which is further escalating the volatility,” says Venkataraman, highlighting the fact that the US recorded an 8.5 per cent CPI inflation in March, which was the highest in four decades.
What does this mean for the Indian stock market? Should investors brace for higher volatility or just continue to invest or trade as usual? The India VIX index—often looked upon as a barometer of near-term volatility—has cooled significantly in the recent past, having fallen over 24 per cent in the one-month period till April 21. The 30-share Sensex is down less than 1 per cent in the current calendar year, even as days of huge swings occur at regular intervals.
“The current volatility is not particularly unusual. If you look at the share price data, it is not suggesting high volatility. The notion that there is something unusual happening in the markets is unwarranted,” says Saurabh Mukherjea, Founder and Chief Investment Officer of Marcellus Investment Managers. “A 20 per cent return in a year is above average return for the Indian market. Even if we look at the YTD return, the Nifty is down less than 1 per cent. This should not be called volatile.”
Indeed, most market participants agree that investors—while they continue investing in stocks—need to tone down their expectations a bit. The past three years saw the Sensex delivering double-digit returns, in each year. There is a wide consensus in the market that returns in the current calendar year could be much lower, but stocks would still fare better than most other asset classes.
And, there are a set of positives as well even as chatter around the negatives is much louder. “The demand environment is solid, the economy is in decent shape and I do not see anything in particular happening that warrants concern about the economy,” says Mukherjea. “Underlying corporate cash flows for well managed firms have been growing at 25 per cent for the past five years and I don’t see any reason why top-quality companies will not see their underlying corporate cash flows grow at 25 per cent over the next five years.” In fact, Mukherjea points out that in 40 per cent of the months over the past 22 years, India’s CPI inflation has been above 6 per cent and high-quality companies have still outperformed.
From a technical point of view, Venkataraman believes that investors should watch out for 16,800 on the Nifty—its 200-day moving average level—even as the 50-share index has corrected and is around its average standard deviation (SD) levels. “Historically, going long on the markets around the average SD line has resulted in above-average returns for the investors. Hence, amidst the volatility, we expect the market to continue to be a buy-on-dip as the correction will provide long-term wealth creation opportunities for investors who missed the previous rally,” says Venkataraman.
The benchmark Sensex is down nearly 7 per cent when compared to its all-time high of 62,245 on October 19 last year. Most of the Sensex constituents are also trading notably lower than their all-time highs and, according to market participants, offer wealth creation opportunities.
There is another interesting piece of data that investors could keep in mind. The longest-ever winning streak for the benchmark indices has been six years starting 2002 and ending in 2007. Incidentally, 2021 was also the sixth successive year of gains. In other words, Indian indices will have to better their previous best winning streak if the current calendar year has to end on a positive note.
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