Buy fear, ride out volatility: Stocks are attractive post correction, say analysts

Indian stocks, among the worst performers over a one-month period, offer relatively less-riskier entry levels to medium term investors as volatility surges in a market buffetted by the world's largest electoral exercise.

The benchmark 50-share Nifty has fallen roughly 2.5 per cent from a record high of 22,794-hit on May 3rd as investors factored in relatively lower voting percentages, a resurgent opposition and muted winning projections for the ruling Bharatiya Janata Party during the 7-phase elections underway presently. Results are due on June 4th.

At the same time, India ViX, an index that measures volatility for options, has more than doubled in a space of 12 trading sessions, prompting traders to question the bull market's valuations. A rampaging ViX also comes at a time when foreign funds are booking profit on fully-priced Indian equities and shifting money to more attractive overseas assets.

The BJP, however, remains confident in posting a stunning electoral victory, bettering its own 2019 performance of 303 seats by a wide margin. Home Minister Amit Shah spoke to reporters today and re-emphasised the BJP's seat projections.

 “I am saying we are going to get 400-plus seats and a stable Modi government will be in power. Therefore, the share market will certainly go up," Shah told news broadcaster NDTV.

"Stock market crashes should not be linked with elections, but even if such a rumour has been spread, I suggest you buy (shares) before June 4. It (market) will shoot up," he added.

Analysts are sanguine too.

“Market looks good. We see very little structural downside but remain cautious," Mayuresh Joshi, Head of Research at MarketSmithIndia, told Business Today. “If the election delivers a clear mandate and the BJP returns to power the street will react positively. There is a high probability that the existing downtrend will be recouped."

Apart from the Nifty, other indices such as the Bank Nifty and the mid & small cap benchmarks have shed between 3-5 per cent from their record peaks as investors booked profit in a market that rallied 17 per cent from October 2023.

ViX's FEAR MONGERING

A vast majority of India's investing and trading class are new entrants into stock markets. Their reading of India's ViX doubling pointing to an electoral upset for the BJP is incorrect and faulty.

The job of India ViX is to mirror rising short-term volatility in option prices ahead of any major event that may impact markets, in this case the national elections. The index is not meant to predict the outcome of elections as erroneously believed.

Those traders and investors buying Put options for June expiry on the Nifty to make a killing or hedge passive portfolios in the unlikely event of the BJP losing substantial ground are going to be unpleasantly surprised.

With rising volatility puts are already costlier. Therefore, even if for the sake of argument the BJP slips in its electoral calculations, then the put option is not going to rise much. Worse, with the event over, volatility will plunge and put options could actually fall!

A better strategy is to sell Nifty futures for the month of June, but that, too, has attendant risks – as the market has already corrected. The best way to ride this volatility is to sit on cash, if at all.

Over time, it has been observed that remaining adequately invested and not predicting shorter-term gyrations are the best for retail investors. Leave the futures and options segment for institutional players and just buy an index ETF, preferably on the Bank Nifty, to benefit from falling prices and their eventual recovery.

Given the near assured economic expansion ahead, Indian stocks offer the best opportunity to make supernormal returns in the long term. This is an opportunity to buy the downtrend, analysts say.