Markets see decline in volatility despite risky global environment


MUMBAI : Investor sentiment in the stock market has turned excessively complacent, with benchmark indices such as Bank Nifty and Sensex surging to record highs on dovish US Federal Reserve minutes, even as analysts sounded a cautionary note of unintended consequences of central bank rate increases on global financial markets.

The complacency is underscored by sentiment gauge India Vix staying around a 16-month low of 11.87 on 23 November, the lowest since 12 July despite global macro headwinds and gross domestic product downgrades by multilateral agencies and banks for the current fiscal year (FY23) and looming recessionary fears in Europe and the US next year. The Vix closed at 13.33 on Friday.

A reading below 14 reflects complacency and excessively bullish sentiment while that above 22 indicates fear and bearishness. Year-to-date, the average on a closing basis has been 19.94.

Stocks globally have cheered the minutes, which showed that most of the 19 US Fed officials believed the pace of rate hikes should slow. However, market experts expressed concern about the impact of unintended consequences of ongoing rate hikes on the global financial system.


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“The short-term view of the Nifty and Sensex remains optimistic, but the biggest risk remains the unintended consequences of persistent rate hikes on the financial system,” said Andrew Holland, chief executive officer, Avendus Capital.

Holland said he’d prefer a theme-based approach to investing, looking at sectors and stocks rather than focus too much on the direction of the indices amid Vix cooling off to multi-month lows.

One of the risky consequences of a sharp cool-off in the Vix is investors not buying enough “protection” against unanticipated volatility, said Rohit Srivastava, founder, IndiaCharts.

“With such low volatility, traders might not be enthused to sell an optimal quantity of put options that protect investors against unanticipated downside risks, even as the latter remain relatively oblivious to factors that could unsettle markets, like persistent inflation and rate hikes,” he said.

The fall in Vix from a high of 15.55 on Monday to a low of 13 on Thursday has sharply driven down the prices or premiums of options as perceptions of risk abate amid global headwinds. The price of the 18,300 Nifty put option, which protects an investor’s portfolio in case the Nifty tumbles below 18,300, fell a whopping 82% from 187 to just 33 a share (50 shares make one contract) over three days. The low price might disincentivise traders from selling options.

Other market experts said that markets would be driven by flows and fundamentals hereon and that sentiment could change depending on these factors.

“History suggests that FPI activities slowdown in December,” said Nilesh Shah, managing director, Kotak Mahindra AMC. “Our markets will be driven by the December quarter results and allocation by FPIs in CY23.”

FPIs have so far this fiscal year sold shares worth $4.3bn against sales of $18.5 bn in FY22.

Ace investor Vijay Kedia advises investors to “stay invested in a sunrise industry at any cost and to stay out of sunset industry at any cost”.

The Nifty hit a fresh 52-week high of 18,534.9 before closing a tad lower at 18,512.75, just half a percent below its record high of 18,604.45 seen last October.

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