Indian equities lose edge over EM peers; Nifty50 is down 7% from Oct highs

The Indian equity market was a star performer and beat most peers in 2020 and 2021. However, it appears to be losing its edge over other emerging and developed markets after the recent correction.

The benchmark Nifty50 has declined 7 per cent from its October high of 18,339, against around 4 per cent decline each in the United States’ Dow Jones Industrial Average and MSCI Emerging Markets Index, while the MSCI World Index has declined around 5 per cent. China’s Shanghai Composite Index, seems to have bucked this trend, having risen around one per cent.

However, the Nifty50 remains the top performer on a one- and two-year basis. It has risen 31 per cent since the beginning of CY20, against a 17 per cent rally in the Dow Jones and just 3 per cent rise in the MSCI EM index. All indices in our analysis are priced in respective local currencies, while the MSCI World and EM indices are priced in US dollars.

Volatility

Additionally, analysts say Indian markets have also become more volatile in recent months. “There has been a sharp rise in volatility in the Indian equity market in the last six months or so, leading to a sharp rally when sentiments are positive and an equally sharp sell-off when sentiment turns sour,” says Dhananjay Sinha, managing director and chief strategist at J M Finance Institutional Equity.

The Nifty50’s recent movements capture this volatility well. For instance, it corrected by 10 per cent between the second half of October and December, followed by 10 per cent of rally. However, the index has given up nearly two-thirds of those recent gains in just the last five sessions. In contrast, the correction has been more orderly in the US and other EMs.

This shows in the volatility indices or Vix. Indian Vix rose 21 per cent on Monday to reach its highest level since May. In comparison, the CBOE Vix, which tracks volatility in the S&P 500 index, rose 12 per cent and is now at its highest level since November 2020.

Analysts attribute the sharp swing in the market to the tussle between foreign and domestic investors. “The foreign portfolio investors have been selling consistently since October, but inflows from domestic investors remains strong, leading to a big swing in the market when this balance of flows changes,” says Shailendra Kumar chief investment officer at Narnolia Securities. He expects a slowdown in trading activity by domestic investors in the coming months that could keep the markets on edge.

“The recent correction is, however, part of the usual market cycle of a big rally followed by consolidation. We had 18 months of a strong season that ended in October and the market is now in a correction phase that may last till March,”
adds Kumar.

Others, though, expect the correction to last longer. “The Indian equity market gained massively from quantitative easing by the US Federal Reserve in the last two years. Now that the US Fed is tightening its monetary policy it could dry-up liquidity, keeping stock prices under check in 2022,” says Sinha.