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Volumes dip, but market volatility rises

Volumes dip, but market volatility rises
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First Published: Mon, Mar 14 2011. 12 33 AM IST
Updated: Mon, Mar 14 2011. 12 34 AM IST
Mumbai: Volatility in Indian equities has reached a 15-month high as uncertainty gripped the markets owing to concerns over interest rates and inflation, fuelled by a surge in oil and commodity prices.
Volumes have dropped, however, as foreign flows have abated.
“As long as such uncertainty remains, it is difficult to make a directional call,” said Huzaifa Husain, head of equities at AIG Global Asset Management Co (India) Pvt. Ltd, which manages Rs 883 crore in assets.
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The historical volatility indices for the Bombay Stock Exchange Sensex and the broader BSE-500 universe are at their highest since December 2009, Bloomberg data shows.
The historical volatility index is based on fluctuations in the closing prices of the indices over the past 60 days.
Indian markets have been more prone to such sharp changes than other Asian markets this year because of local concerns relating to political and corporate governance, said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as a foreign institutional investor (FII) in India.
Implied volatility indices, which are an indicator of future volatility and based on prices of options, have also moved up. The National Stock Exchange’s volatility index has been trading near 25 points since February, a level last seen in June 2010 after the Greek sovereign debt crisis.
“Investors have been unwilling to sell options as uncertainty has gone up,” said Siddharth Bhamre, head of derivatives at Angel Broking Ltd. Besides, foreign investors have also started going short on index futures, indicating that the market is unlikely to rally, Bhamre said.
The rise in volatility has been accompanied by a fall in cash volumes as FIIs have stepped away from Indian markets and bought stocks in more attractively valued markets.
The lack of opportunity in portfolio reallocation is also keeping volumes low, Husain pointed out.
“If oil moves up, the entire market would be affected adversely, and hence, the scope for sectoral reallocation is limited,” said Husain.
Lacklustre institutional participation has led to low volumes, reducing the depth in the market and making it more volatile, analysts said.
FIIs have so far pulled out $1.7 billion (Rs 7,684 crore) worth of equities net of purchases this year, after pumping in a record $28 billion last year.
Indian stocks have found fewer takers as money has flowed into developed markets, given the better growth expectations, based on which the International Monetary Fund raised its global growth forecast to 4.5% in January.
Concerns on governance, inflation and the impact of the rise in commodity prices on company earnings took the shine off Indian markets, which fell 11.4% over the course of the year, underperforming peers.
Although recent data on inflation, current account deficit and factory output have been positive, investors are edgy as oil prices still remain high, said Tirthankar Patnaik, strategist at Religare Capital Markets Ltd.
“A $1 per barrel increase in oil prices would increase the trade deficit by $800 million and raise oil companies’ under-recoveries by $700 million,” an 11 March note by Rohini Malkani and Anushka Shah of Citigroup Global Markets Inc. said, referring to losses made by state-run refiners on account of fuels being sold at government-mandated prices.
The impact on inflation could range from 0.68% to 3.4% and on growth from 20 to 30 basis points (bps), depending on how it is transmitted, the note added. One basis point is one-hundredth of a percentage point.
Citigroup has revised its 2011 global oil price forecast to $105 per barrel from $90 per barrel.
The consensus on the Street seems to be that Indian markets will underperform in the first half of the year as oil prices remain high, interest rate hikes take effect and analysts downgrade earnings estimates of firms, while better valuations and a reversal of fund flows from developed to emerging markets could start favouring India in the second half.
Rising crude prices have raised doubts on the extent of the growth recovery in the developed world and led to a drop in equity indices in developed markets, which had been moving up since November.
The S&P 500 index has fallen 1.9% even as the MSCI Asia (ex-Japan) index rose 1.6% in the past one month. The Sensex has gone up 2.5% in the same period.
Markets fell globally after a huge earthquake hit Japan on Friday, further dampening investor sentiments already shaken by high oil price and unrest in West Asia.
In the past week, both JP Morgan Securities and Macquarie Securities have said the developing-to-developed market fund flow may be short-lived as the valuation differential has narrowed considerably now.
While Asian markets look likely to gain as earnings expectations have moved up, India might not be a major beneficiary immediately as it is the only country in the region where analysts have not upgraded earnings estimates, according to an 8 March note by David Rickards and his team of analysts at Macquarie.
So far, the outflow from India has largely been on account of short-term flows, with longer-term investors keeping their India exposure largely unchanged.
“Flows through ETFs (exchange-traded funds) accounted for 15% of the funds flow of $28 billion last year, but they account for roughly 50% of the net equity sales by foreign investors in 2011,” said Patnaik. “This means long-only funds are still invested in India.”
While there has been no major sell-off from these investors so far, there have been no fresh investments either.
Inflation, the interest rate cycle and the outcome of assembly elections will be keenly watched by investors, said Bhat of Dalton Strategic Partnership. These factors, apart from crude oil prices, would be the key determinant of foreign fund flows, he added.
Ashwin Ramarathinam contributed to this story.
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First Published: Mon, Mar 14 2011. 12 33 AM IST