Margin calls by brokers heightened volatility

The markets have been volatile, with bears emerging and building short positions. (Photo: Mint)
The markets have been volatile, with bears emerging and building short positions. (Photo: Mint)

Summary

  • People have been building derivatives positions for quite some time in the market. The outstanding position in F&O swelled to ten times the daily trading volume. Unwinding of these positions added to Tuesday's volatility

The current market volatility and correction in both the Sensex and the Nifty is an outcome of the Lok Sabha election results. It fell short of the general expectations of market players being built up in the last two weeks and also exit poll results, due to which the markets have been volatile, with bears emerging and building short positions. After the exit poll results, the market rise was attributed to short covering by bears. Tuesday’s significant fall could largely be attributed to the election result falling short of expectations.

As is known in the Futures and Options segment, people have been building positions for quite some time in the market. The outstanding position in F&O grew so big, that the outstanding position became close to ten times the daily trading volume. I must also mention that this huge outstanding position in F&O market also added to the volatility, due to the unwinding of F&O positions. Normally when uncertainty sets in the market along with increased volatility, margin call comes, forcing F&O traders to sell stocks, even if one doesn’t want to, because the loss in the market has to be compensated. Therefore, the current market volatility needs to be looked at from that angle.

Read | Stocks lift off as saffron storm brews in market crystal ball

Overall equity markets have scaled significantly in the last few years, on the back of a strong economy and political will. Compared to most other economies globally, India has been consistently growing and leading on several macroeconomic parameters. In my opinion, this trend should continue going forward even after the current election result and government formation.

The biggest strength of the Indian economy has been a stable and forward-looking policy framework, making India a prominent and high-growth economy in the world. In fact, this narrative is not altered, however, one might witness marginal slowdown in the pace of execution. The India growth story was also supported by government-owned enterprises moving up in market cap, which is nothing but a rerating of the companies from undervalued to being reasonably valued. These enterprises have seen a significant pickup in earnings growth by largely participating in the overall economic momentum that the country has been witnessing.

Mint Explainer: Why the national election is making the market swing wildly

One must also keep in mind that Indian markets have been one of the best-performing markets in the world. And most of the returns got front-loaded, on the expectation of a thumping majority for the current government and the fast tracking of economic growth for the future. This frontloading of returns, in fact, did put a question on the attractiveness of the Indian capital market adjusted for growth and earnings. As the school of thought exists, any big correction in the market will never come with a warning. Therefore, the current volatility should be seen in that light, and the market has finally found some reason to correct itself, reducing the excess in valuations built in the last six months or so, based on high expectations.

Going by the history of the markets, a single-day correction of more than 10% generally never gets repeated for quite some time. However, the markets may remain volatile till the formation of the government and the narrative for the next five years envisioned by them. Additionally, I am sure the Budget will play an important role in setting the ball rolling.

And this | In a market segment with its ear to the ground, apprehension is rising

The momentum that has been built in the last few years will gain further ground, driven by rising GDP growth, low inflation, stable interest environment, stable currency, low current account deficit, improved Balance of Payments, improving fiscal deficit and increased earnings of companies. Steady progress in tax collections, both direct and indirect, should further improve the fiscal deficit, in turn making a case for a rating upgrade for India. Therefore, it is important to remain confident of our long-term growth story and stay invested in India.

Continued FDI investment and reforms such as Make in India and Startup India will further help India to rise to a new level on the path of a high-growth economy. None of these narratives are going to change, therefore we should look beyond yesterday’s volatility. It should be seen as a time to look at the portfolio, rebalance where necessary and increase commitment for the long term. On the mutual fund front, one should continue to use this vehicle for the purpose of long-term investing and build a robust portfolio for the next 5 to 10 years.

The author is MD & chief executive Aditya Birla Sun Life AMC. Views expressed are personal.

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