scorecardresearchVolatility spikes and investors look nervous; what lies ahead for the market in short-term?

Volatility spikes and investors look nervous; what lies ahead for the market in short-term?

Updated: 09 May 2022, 07:59 AM IST
TL;DR.

  • The market has many reasons to worry at this juncture. While soaring inflation rate hikes and geopolitical tensions are the short term factors, signs of stress in economic growth is portraying even the long term picture uninspiring.

The rise in the volatility index can be primarily attributed to the rate hikes by the central banks such as the Bank of England, US Fed and RBI. Photo Credit; Pixabay.

The rise in the volatility index can be primarily attributed to the rate hikes by the central banks such as the Bank of England, US Fed and RBI. Photo Credit; Pixabay.

The Indian market has been volatile of late amid worries over rising interest rates, the Russia-Ukraine war and inflation.

Rate hikes by major central banks and the anticipation of even more aggressive hikes in the near future seem to have dealt a strong blow to market sentiment. The domestic equity market is witnessing selling in most sectors while the volatility index India VIX rose 4.71 percent to 21.25 on May 6.

The volatility index is a quantifiable measure of volatility based on the Nifty Index Option prices. It is an important indicator of market risk and investors’ sentiments. It is calculated in percentage and does a projection of how fast the prices would change in the next 30 days.

When the market index (Nifty) suddenly spurts or falls, the projection of how fast the stock prices would change in the immediate future would also change. The volatility index rises with extreme price changes.

The higher level of VIX normally reflects a higher level of fear prevailing in the market.

Why is the market nervous?

The market has many reasons to worry at this juncture. While soaring inflation rate hikes and geopolitical tensions are the short-term factors, signs of stress in economic growth are portraying even the long-term picture as uninspiring.

"The single important factor roiling global equity markets is the reemergence of inflation as a major threat and market's skepticism over the central banks' ability to contain inflation without triggering a sharp economic slowdown," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

As per Milind Muchhala, Executive Director, Julius Baer, the sentiment continues to remain weighed by the ongoing geopolitical crisis, supply chain challenges, persistent inflationary pressures, rising bond yields, and the expectations of harsh action by the US Fed in terms of the rate hike and tightening, all of which can start weighing on economic activity and earnings momentum.

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We explain volatility index in this infographic.

Muchhala believes the markets will continue to remain influenced by the Fed action and rhetoric in the near term. The recent hike by the RBI (both repo rate and CRR) also resulted in incremental uncertainty; although the hike was largely anticipated to flow through over the period, the timing came in as a surprise, as probably the RBI was trying to preempt the Fed action.

"The Q4FY22 earnings season has also been some sort of a mixed bag until now, with margin pressure clearly coming to the fore, and concerns emerging on delay/destruction of demand due to persistent inflationary pressures. Overall, there seems to be a risk-off environment currently in play, and with no major positive in sight, is affecting the market performance as investors weigh their overall asset allocation in the light of increasing uncertainties and rising yields," said Muchhala.

The current rise in the volatility index can be largely attributed to the rate hikes by the central banks such as the Bank of England, US Fed and RBI.

"The Volatility index increased because Bank of England projected inflation over 10 percent in 2023, the US Fed had increased the interest rate by 50 basis points which is the highest in past 22 years and at least two more similar increases are expected, RBI has also increased the interest rate by 40 basis points that lead the markets fell deeper into the red," said Akhilesh Jat, an analyst at CapitalVia Global Research.

Besides, the volatility index is rising due to high uncertainty prevailing in the markets in terms of the ongoing Ukraine war and economic growth. Rising inflation is eroding consumer demand and higher input cost is putting pressure on the margin of companies. All these factors have made the road ahead bumpy.

Amit Gupta, Fund Manager – PMS, ICICI Securities pointed out the risk perception has increased as globally inflationary expectations have gone up and interest rates are getting front-loaded in major economies. In addition, the geopolitical scenario has worsened with the Ukraine-Russia war still continuing which is also fuelling inflation as these are commodity producers. The sudden rise in interest rates is increasing the fear of a slowdown in growth going forward.

The road ahead

The market is likely to remain volatile in the near term amid concerns over the Ukraine war, inflation and rate hikes. For the time being, stock-specific action based on corporate earnings may prevail.

Muchhala is cautious about the market as the key challenges for the markets since the start of the year in the form of inflationary pressures, rising bond yields and the action by the global central banks are pretty much still prevalent. In fact, the recent developments related to the geopolitical situation and the fresh wave of the pandemic in China have further complicated the situation.

"While the strong domestic flows have helped to absorb the relentless FII selling over the past few months, this could also get tested once markets move into a correction phase. While the relatively stronger economic growth and earnings cycle will remain the key pillars for the market over the medium-longer term, the uncertainty and volatility are likely to continue for some more time with too many moving parts, which can provide intermittent opportunities," Muchhala said.

"Amid rising interest rate, elevated crude oil price and high inflation, the markets will likely remain volatile. Further, stock-specific action can be expected based on Q4 results and management commentary,” said Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities.

Gupta of ICICI Securities highlighted that the market has been consolidating for the last one year within 15,000-18,000 levels and the trend may extend if the geopolitical tension doesn’t cool down.

"On the domestic front, we have seen operating margins of the companies have come under pressure however hopes are aligned with the opening up of economies as Covid fear is subsiding," he said.

Yash Gupta, Equity Research Analyst, Angel One, suggests investors not to follow buy on dips strategy as the market is in a downtrend and it will be volatile also due to global markets as well as India's own issues.

"We suggest investors deploy money in parts, so right now investors can deploy 25 percent of new money to invest in the market," said Gupta.

Disclaimer: The views and recommendations made above are those of individual analysts and not of MintGenie.

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First Published: 09 May 2022, 07:59 AM IST