Market in for a bumpy ride as experts see volatility in equities ahead

Friday was particularly volatile, with the Sensex swinging 1,500 points amid a sharp correction in financial stocks, before closing 280 points lower

It has been an unnerving time for investors with markets showing no clear direction. This month, the benchmark Sensex has gained or lost more than 300 points on six of the 13 trading days.

Friday was particularly volatile, with the Sensex seeing a 1,500-point swing — amid sharp correction in financial stocks — before closing 280 points lower. The immediate trigger was the uncertainty surrounding the future of IL&FS and tighter liquidity conditions. The India VIX, a measure of investors’ perception about the risk of sharp swings based on options prices, rose about 10 per cent to 15.4.

“For VIX, 16-17 is the level to watch out for and any up-move beyond this level will be a sign of caution,” said Sneha Seth, derivatives research analyst, Angel Broking. “For Nifty, there is a likelihood of a steep correction to 10,850-levels if the market does not go past 11,350 in the next few sessions.”

Banking stocks, in particular, may be in for a rough ride, says Seth — considering the Bank Nifty index has seen consistent shorting in the past couple of weeks. Most banking stocks fell on Friday, with YES Bank slipping 28.7 per cent.

“Since markets are already richly valued, any negative news flow is having a negative multiplier effect. While the markets didn’t tank as much at the time of closing, the correction of more than 1,000 points is a cause for concern and could hint at more volatile times ahead,” said AK Sridhar, director and chief investment officer, IndiaFirst Life Insurance.

Experts believe that factors such as the movement of interest rates, global crude oil prices, fiscal and current account deficit numbers, and the rupee’s weakening could lead to further volatility in Indian equities.

“The current fall in the market has been led more by perception and fear, than fundamentals. We are seeing a divergence in the market, where some segments are richly valued and others outside the benchmark Nifty are getting battered. I expect quality mid-caps to make a comeback going forward,” said G Chokkalingam, founder of Equinomics Research & Advisory.

According to a recent note by Goldman Sachs, Indian equities are now the most expensive in Asia and are trading at a record 58 per cent premium to the region. At these levels, equities have historically posted negative returns over the following three-six months, the brokerage says.

“Given elevated valuations and the recent strong performance, we believe the risk/reward for Indian equities is less favorable at current levels, and we lower our investment view from overweight to market weight. We expect markets to consolidate heading into the elections and Nifty to reach our 12-month target of 12,000 as political uncertainty wanes and earnings accrue,” stated the report.