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Business News/ Markets / Stock Markets/  Markets brace for turbulence over US polls, 2nd covid wave
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Markets brace for turbulence over US polls, 2nd covid wave

The BSE Sensex ended 173 points lower at 39,749.85 on Thursday, while the Nifty index ended at 11,670.80, down 59 points
  • Analysts expect the market to stay volatile until a clear winner emerges in the US elections, and expect the pandemic to cast a shadow after the election as well
  • The Bombay Stock Exchange building is seen from a facade in Mumbai. (REUTERS)Premium
    The Bombay Stock Exchange building is seen from a facade in Mumbai. (REUTERS)

    A second wave of coronavirus infections sweeping Europe and jitters over the outcome of the presidential election in the US have driven up volatility worldwide, including in Indian markets.

    The India volatility index (VIX), also called the fear index, has spiked over 20% in October, indicating investors expect further corrections, given that US election outcomes have historically impacted market sentiment.

    The BSE Sensex ended 173 points lower at 39,749.85 on Thursday, while the Nifty index ended at 11,670.80, down 59 points.

    Analysts expect the market to stay volatile until a clear winner emerges in the US elections, and expect the pandemic to cast a shadow after the election as well.

    Divergent paths
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    Divergent paths

    “Historical analysis reflects that, typically, post a crisis, the first six months of a new president witnesses a contraction in equity markets of about 10% versus a contraction of 4% for presidents that do not follow a crisis. Therefore, some market correction cannot be ruled out, and one must hedge the portfolio," analysts at Edelweiss Broking Ltd said.

    As the US economy opens up, investors are expected to buy recovery plays in equities and keep a mild pro-cyclical stance. Analysts expect positive returns from equities on support from ultra-loose monetary policies by major central banks.

    “The key issue for financial markets in the next several months is not who wins the presidential election, or the state of US-China relations, but how the Fed reacts to the cyclical return to normal. As for the other global central banks, they will most likely follow the path set by the Fed," said Christopher Wood, global head (equity strategy), Jefferies.

    India remains the top performer in October among global peers with its benchmark indices rallying over 3% in dollar terms, while MSCI World declined around 3%.

    Analysts at Credit Suisse Wealth Management India said equity markets are expected to remain volatile ahead of the US presidential election. However, from a medium-term perspective, equities are still the preferred asset class, given the ultra-low-interest-rate environment worldwide.

    “As expected, the yields have started falling in India, and we believe the yields could see further compression in the next few months once the retail inflation starts to abate," it said.

    Foreign institutional investors (FIIs), who often play a decisive role in shaping sentiment have pumped in $6.8 billion in Indian shares in 2020 so far, including $2.8 billion in October.

    According to Morgan Stanley, passive inflows worth $2.5 billion could flood Indian equity markets with the implementation of new foreign ownership limits in the MSCI Global Indexes, which is widely used by fund managers to determine asset allocation across markets based on their weightage.

    “We expect foreign investors to turn more discriminatory, repricing risk in EMs that are deemed to face dangerously high debt levels and/or balance of payments vulnerability," said Nomura in a note on 28 October.

    MSCI India’s valuation premium to MSCI EM is around 49%, versus a long-term average of 41%.

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    Published: 30 Oct 2020, 05:51 AM IST
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