After market shivers, volatility thaws out in second half of 2022

Revival in FPI flows, sharp recovery from year's lows in June helped calm investor nerves

The calendar 2022 has proven to be a study in contrast as far as volatility goes. If the first half saw stormy weather, the second half was an oasis of calm.

During the first six months of the year, the Sensex gained/shed 1 per cent or more over its previous day’s close on 55 occassions. By comparison, the second half saw just 22 such trading sessions.

Revival in foreign portfolio investor (FPI) flows and sharp recovery in the market from this year’s lows in June — amid improved economic and earnings outlook — helped assuage investor nerves.

The year started off capriciously, feeling the blunt force trauma from global headwinds, such as a hawkish pivot by the US Federal Reserve, the spread of Covid in China, and Russia’s siege of Ukraine. 

The Sensex saw 1 per cent gyration almost every day during the first half. In the second half, the Sensex saw a similar swing in only one of the five sessions, indicating relative calm. This, even as volatility was a consistent feature for major global markets, such as the US and China.

In the first half, the US Dow Jones (Dow) gained/lost 1 per cent or more on 52 occasions. There have been 46 such sessions so far during the second half.

The fall in volatility also helped the domestic markets outperform most global peers. The Sensex gained 17 per cent during the second half, even as the Dow gained 8.9 per cent.

The biggest market driver this year has been FPI investment behaviour, observe experts.

Between January and June, overseas investors yanked out a record Rs 2.2 trillion from domestic equities. Meanwhile, between July and December, they had pumped in Rs 90,000 crore.

So, what worked for the domestic market?

“Some things have worked in India’s favour,” says Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas. 

“We’re clearly in a period of global economic slowdown, particularly developed market demand retrenchment. This is having a disproportionately negative effect on North Asia. If you look at economies like South Korea or Taiwan, or even parts of China, they are big exporters to the developed markets. In contrast, India is largely a domestic economy. Several large sectors of the market are still domestically focused.”

A calmer market bodes well for investor sentiment. Sharp swing in stock prices discourages retail participants.

This was seen playing out this year. A sharp spike in volatility during the first half impacted retail participation, slowed the pace of new account openings, and dented average daily turnover.

Market players in the domestic markets are pricing in high optimism and expensive valuations as one of the key risks going into 2023.

Last week, Nomura said India’s outperformance could taper as markets like China play catch-up.

“China’s reopening and recovery will benefit beaten-down North Asia over the Association of Southeast Asian Nations and India,” says Nomura, which has an ‘underweight’ stance on India.

“Relative valuations, even at single stock level (for India) and elevated, remain our key concern after strong outperformance in 2022. The economy is likely to see a slowdown in growth due to global slowdown which, in our view, is not reflected in consensus expectations. A likely rotation into North Asia in 2023 may imply much smaller than hitherto support from foreign flows,” it points out.