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Investors in Indian shares are growing increasingly anxious after a stellar rally.
The India VIX Index, which measures the cost of NSE Nifty 50 Index options, has risen the most since September 2016 in January, climbing in tandem with the equity gauge. While the trend has been similar in the US and other Asian markets, it’s especially pronounced in India, where five straight weeks of simultaneous gains marked a record.
With Finance Minister Arun Jaitley readying to deliver the Union Budget 2018 on Thursday, traders are seeking to hedge a rally that has added more than $425 billion in equity values in the past four months. The Nifty, which has already hit 13 records in January, trades at 18.4 times estimated earnings for the next year, near an all-time high and a 30 per cent premium to the MSCI Asia Pacific Index.
The fact that the India VIX and Nifty have been moving together “reflects the rising wariness in the market around the rapid run up in prices” Sunil Sharma, chief investment officer at Sanctum Wealth Management Pvt. in Mumbai, said by phone. “Investors are focused on the budget and monetary policy, and concerns that fiscal targets may not be met due to more spending on the social sector and infrastructure. We’re advising clients to hedge their stock purchases.”
The equity rally paused on Tuesday after a global selloff started in the US reverberated across markets. The Nifty lost 0.7 per cent, the most since Jan. 1, while the India VIX tumbled 8.2 per cent, both gauges still moving in unison for an eighth day, the longest streak since 2013.
Traders have boosted hedging this month, with almost 1.3 million bearish Nifty options changing hands each day on average. That’s 22 per cent more than call volume, the highest proportion since August 2010, data compiled by Bloomberg show. Five of the six most-owned contracts are puts expiring in February, with those protecting against a 5 per cent decline having the largest open interest.
Some investors say stocks are due for a reversal following the strong inflows of late. While agriculture and infrastructure companies are seen benefiting from higher government spending, the uncertainty over the pace of fiscal consolidation will be the key risk, according to Nomura Financial Advisory & Securities India Pvt.
“Investors are insulating from the big event risk by buying protection even at higher volatility,” said Vaibhav Sanghavi, co-chief executive officer at Avendus Capital Alternate Strategies in Mumbai, whose firm manages $630 million in assets. “We expect volatility to cool off after the budget.”