Are Indian markets headed for more volatility?

With the Indian market becoming more reactive to news flows, volatility has increased substantially, but India is comfortably positioned against global indices

At the start of 2016, there were little hopes pinned on Indian equities, and then the Union Budget changed the course. But along with this, volatility in Indian equities has also increased significantly. 

Beta, which measures a stock’s volatility against the broader index, indicates that 125 out of 200 companies, forming part of the S&P BSE 200 index, have risen by an average of 16% since the start of 2016. 

The rise in volatility has largely been contributed by stocks in the banking and financial services (BFSI) segment, with 30 out of 39 stocks representing the BFSI segment witnessing an increase. Beta of stocks such as Allahabad Bank, Bank of Baroda and Punjab National Bank have swung by 15–21% in the last five months, while non-banking finance stocks such as Dewan Housing, M&M Financial Services and Shriram Transport have seen far higher rise.

However, volatility in the BFSI segment may be attributed to a string of news around issues surrounding asset quality and its resultant impact on earnings as seen in the March 2016 quarter and news of capital infusion and consolidation particularly driving the state-owned banks. But what is more eye-catchy is the movement in sectors such as fast-moving consumer goods (FMCG), IT and pharmaceuticals perceived as relatively defensive. Seven out of 11 FMCG companies in the BSE 200 index have witnessed 14% average increase in beta, while nine out of 11 IT stocks in this universe saw an average beta jump of 17.6%. 

Interestingly seven out of nine automobile companies (now considered the market favourites) are also trading at higher betas (up 20%). 

About two years ago, barring Wockhardt, beta of other healthcare stocks was comfortably below one. Today, five out of 20 healthcare stocks trade at beta of over one. Beta of one or more indicates that the stock is more volatile than the underlying index. While high beta stocks tend to gain ahead of the underlying index, the fall in these stocks is also steep when there is a broader market correction.

Deeper reading of numbers indicates that there are more stocks trading at a beta of one and above compared to what was in 2014. In January 2014, 68 stocks in the BSE 200 index were at a beta of one or more. This now stands at 92. Interestingly, beta of Bharat Electronics, Cairn India, Jubilant Food and Hexaware Technologies, which were at 0.4 levels are now at 1.17 to 1.53 levels.

“Beta has gone up because of many unpredictable global factors. The swings in commodities on both sides have been very sharp and when you have such sharp moves you will have volatility”, explains Gautam Chhaochharia, head of India research, UBS. 

Nitin Bhasin, head of research, Ambit Capital, while agreeing with Chhaochharia, adds that with increase availability of capital, volatility also tends to be higher in equities. “There is a mix of caution and optimism in the statements issued by US Fed. There is also no reason to believe that there is secular trend in the Indian markets right now”, he says. Bhasin contemplates that even as the volatility in the underlying data points are high, equities as an asset class is becoming largely sentiment driven.

Deven Choksey, MD, KRChoksey Investment Managers feels that the volatility in Indian equities may stay for a few weeks. “There is a reduction in number of fresh positions being taken in the derivatives market”, he points out, which he says is an indicator of how one could see sharp swings in equities. “This phase could persist until there is clarity on Brexit (Britain exiting from the European Union)”, he adds.

But, there is a bit of breather for investors. Even as underlying volatility in Indian equities is increasing, the situation in-house is still better than global volatility. 

The Beta of Sensex against MSCI Emerging Markets index has risen from 0.837 to 1.03 since the start of the year, but the movement in the Hang Seng index (China) or Ibovespa Index (Brazil) is even sharper. Hang Seng has increased from 0.824 to 1.056 since January and Ibovespa has risen to 1.368 from 0.89. The S&P 500 (US) itself has seen its beta measured against MSCI World Index increase from 0.7 to 0.928 level since January 2016. 

Experts say as more uncertainties prevail in these economies, global volatility may remain and Indian stocks may comparatively be more insulated as signs of green shoots are becoming prominent domestically.