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Business News/ Market / Stock-market-news/  Market volatility touches record lows

Market volatility touches record lows

India VIX index fell to an all-time low of 8.4 on Monday before closing at 10.67 as investors increase bets on the country

The low VIX number indicates that investors are not expecting any major correction at least over the next month. Photo: Hemant Mishra/MintPremium
The low VIX number indicates that investors are not expecting any major correction at least over the next month. Photo: Hemant Mishra/Mint

Investors in Indian stocks seem to be getting complacent about risks. The India VIX index, the so-called fear index, fell to a record low of 8.4 during the day before closing at 10.67 on Monday. The volatility index typically has an inverse correlation with the benchmark Sensex and Nifty indices, both of which closed at record highs.

Lower-than-expected inflation which might spur a rate cut from the central bank and the early onset of the seasonal monsoon rains in the Nicobar islands are prompting investors to increase their bets on India, said analysts.

“Markets are in a comfort zone," said Rakesh Tarway, head of research at Reliance Securities. They “are expected to gain further on earnings growth".

VIX is the investors’s perception of the market’s volatility in the near-term. The low number indicates that investors are not expecting any major correction at least over the next month.

Derivatives analysts said the increasing confidence about the markets can be seen from the increasing net call option positions (option to buy) of foreign institutional investors (FIIs), the biggest grouping to use hedging strategies in Indian markets.

Also read | Nifty at 9,400: How rational is this exuberance?

FIIs hold a “good amount of long positions in stock futures and index call options along with writing index puts, which is a positive sign," said Sneha Seth, an equity derivatives analyst at Angel Broking.

To be sure, the India volatility index is not the only one to plunge to new lows. The Chicago Board Options Exchange’s (CBOE) volatility index fell to 9.77 on 8 May, its lowest level since 1993. The VIX index closed under 10 points on 0.1% of the span’s nearly 7,000 trading days.

“Very low VIX index reflects a great deal of confidence that there won’t be a deep sell-off by equities. Not only is there effectively little demand for insuring against a harsh correction, but sellers of such insurance are willing to accept a low price for protection against a market plunge," said Moody’s Analytics in a 11 May report.

The low CBOE VIX has sparked commentary that perhaps the index isn’t working anymore as a gauge of fear. However, Mark Mobius, executive chairman of Templeton Emerging Markets Group, has another explanation.

In an 11 May interview to Bloomberg, Mobius said that low volatility could also be owing to the impact of social media and the confusion surrounding fake news.

“You’re getting a situation where a lot of information is discounted immediately because people are afraid that maybe the information they are getting is not true," Mobius told Bloomberg.

Still, the fact remains that investors could well be underestimating risks which range from earnings downgrades, geopolitical risks and the implementation of the goods and services tax.

The Sensex trades at 18.24 times its earnings estimate for fiscal 2018. Results for the March quarter are not showing a broad-based earnings recovery but in selected industries such as cement.

Indeed, analysts such as those in Kotak Institutional Equities are warning about more risks to earnings.

“We note that the risks of earnings downgrades have increased from higher-than-estimated loan-loss provisions in the banking sector, weaker-than-expected commodity prices (metals, oil and gas) and stronger-than-expected exchange rate (IT, metals, oil and gas, pharmaceuticals)," they wrote in a 5 May note. “Any disappointment in earnings in the aforementioned sectors will lead to significant earnings downgrades for the overall market."

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Updated: 16 May 2017, 04:33 AM IST
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