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Home / Market / Stock-market-news /  How are markets positioned ahead of Brexit vote?

Mumbai: Foreign institutional investors (FIIs) are turning cautious and buying downside protection in the Indian market, as the world braces for Britain’s Thursday referendum where voters decide if Europe’s second-largest economy will continue to be a part of or exit the European Union (EU).

As per the betting odds, there is a greater probability that Britain will vote to stay in the EU rather than leave, which has helped world markets recover this week, although opinion polls show the two camps are roughly neck-and-neck.

In the event that Britain decides to leave EU, risk could be taken off the table across the globe, analysts said. It would trigger a flight to safe haven assets, and riskier assets such as emerging market equities, including India, stand to face the brunt.

Indian markets closed marginally lower on Tuesday and Wednesday. BSE’s 30-share Sensex closed 0.18% or 47.13 points lower at 26,765.65, while National Stock Exchange’s 50-share Nifty shed 0.20% or 16.20 points to close at 8,203.70.

“FIIs have been buyers of out of the money put options, to hedge themselves, before the Brexit decisions arrives," said Hemant Nahata, senior derivatives analyst at IIFL Holdings Ltd.

A put option is said to be out of the money if the current price of the underlying stock or index is above the strike price of the option.

Also Read: The ins and outs of Brexit, and the consequences for India

The bullishness of FIIs had been on the rise in recent times before the US Federal Reserve policy outcome and Reserve Bank of India (RBI) governor Rahuram Rajan’s decision to not opt for a second term was announced, as Asia’s third-largest economy seemed to be one of the most lucrative bets, given the traction in the economy, prospects of better monsoon and improving corporate earnings.

FIIs had lapped up Indian equities for 14 sessions in a row to 13 June, their longest such winning streak since November 2014, and had bought a net of more than $1 billion of Indian shares in the period. After that, they have been sellers in five of seven sessions.

The early bullishness was clearly visible in their positioning in the derivatives market at the start of June as well.

“We briefly started the month with FIIs’ ratio of long positions to short positions was around 6.9-7:1. However, over the last few days it has come down to around 3.3:1. Though they are still more long positions than short, the magnitude of such bullishness has come down sharply," said Nahata.

With one more day to trade before the Brexit decision, Nahata says the market could see more squeezing on Thursday.

Others shared the view.

“In the last three sessions, FIIs have reduced their bullishness net long open interest in index futures, adjusted for options positioning, dropped drastically in the last three sessions, even though the probability of Brexit has dropped significantly," said S. Hariharan, head of sales trading at Emkay Global Financial Services Ltd.

“The data seems to be pointing that out of the money puts are being bought," said Hariharan.

The market regulator and stock exchanges were also gearing up for any likelihood of volatility, and said they were well-placed to handle it in case Brexit is announced.

“There are safeguards in place to take care of market volatility," said V.R. Narsimhan, chief of regulations at NSE. A BSE spokesperson also said the exchange is closely monitoring the markets, and all its systems are in place.

Also Read | VIX levels show China risk much more important than Brexit

A Press Trust of India report said capital market regulator Securities and Exchange Board of India (Sebi) has also beefed up its surveillance mechanism to deal with any excessive volatility in the run-up to the Brexit referendum. A Sebi spokesperson did not respond to calls seeking a comment.

Dealers expect the market to trend upwards over the medium term, and said the dips, if any, in case Brexit is a reality, would be of a temporary nature, as market fundamentals remained positive in the light of improving corporate earnings.

Analysts have been expecting Sensex and Nifty earnings to post a double-digit profit growth in the fiscal year 2016-17.

“Technically, the structure of the market remains positive, there is some sort of skepticism that has penetrated the market, and investors are hedging their risks," said Sahaj Agrawal, deputy vice-president of derivatives at Kotak Securities Ltd, adding that in the event that Brexit does happen, the Nifty may test 8,000-8,050 levels.

“Nifty at 7,950 is the trend deciding level. If it dips below that we would turn cautious, but if that level is not broken, we are positive and expect Nifty to reach a 8,350-8,550 range in three to five weeks post the Brexit decision," Agrawal added.

Reuters contributed to this story.

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