Rising volatility in India's equity markets: What lies ahead?

Monday mayhem—that was the echoing sentiment on August 5, when the benchmark BSE Sensex crashed 2,222 points as fears of a potential recession in the US drove investors away from risky assets. This fall was seemingly triggered by external stimuli and not as much by domestic forces as the equity markets were hovering at record-high levels. Amid geopolitical tensions, the Bank of Japan’s (BOJ) recent decision to raise interest rates triggered a ripple effect across global markets, including India. At the July meeting, the BOJ raised its policy interest rate to 0.25% from 0-0.1% earlier. Despite the volatility, analysts remain bullish on India, citing long-term growth.

Experts also expect the upcoming US Presidential elections to bring some unpredictability. The lukewarm global job market and on and off geopolitical tensions are likely to add to the woes.

Harshad Borawake, Head of Research and Fund Manager at global mutual fund AMC Mirae Asset Investment Managers (India) says, “The risk can be from global uncertainty, oil price spike or sudden increase in international commodity prices.”

He adds that the monsoon and geopolitics could affect the near-term progress and sudden global moves (like BOJ) could dampen investor sentiment. “However, as long as the domestic corporate earnings growth continues, materialisation of any of these risks can be seen as a buying opportunity,” he says, adding, energy prices will also be under close watch.

The 30-share Sensex, which scaled its all-time high of 82,129.49 on August 1, 2024, gained 10% year-to-date (YTD) till August 9. The 50-share NSE Nifty index also rallied 12% during the same period. The index also hit a lifetime high of 25,078.30 on August 1. On the other hand, Brent crude in the international markets in 2024 increased 3.40% on a YTD basis, hovering at around $79.66 per barrel on August 9. It had touched a high of $91 per barrel on April 5 and a low of $75 per barrel on January 2.

In the broader markets, the BSE MidCap and BSE SmallCap indices have outpaced the benchmark equity index Sensex. The former has gained 28% YTD. The latter has rallied nearly 26% until August 9.

“[It is] not fair to paint the entire basket with one brush,” says Sandip Bansal, Senior Portfolio Manager at AMC ASK Investment Managers, on the outperformance of broader markets. He adds that many businesses have seen a sharp improvement in earnings or long-term growth prospects and in such cases the returns have a fundamental basis and are not necessarily due to liquidity-chasing stocks. “It may become more stock-specific, with returns aligning themselves with those companies that deliver on high expectations.”

Sunny Agrawal, Head of Fundamental Research at SBI Securities says, “A few mid-and-small caps are trading at obnoxious valuations and the probability of a deep correction exists in case of any disappointment on the earnings growth front.”

In terms of valuations, the 50-share Nifty index traded at a price-to-earnings multiple of 22.67 times on August 9, 2024 against its long-term average (10-year) of 24.77 times, indicating that large-caps are not overvalued currently.

Agrawal says the Nifty50 is trading at 22.7 times FY25 consensus earnings per share, which is neither cheap nor exorbitant. “Every dip is likely to be bought into by retail investors who have missed the bus post the General Elections outcome. Volatility is likely to increase significantly, led by a tough fight between bulls and bears in the fast-changing regulatory environment pertaining to the domestic capital market. Overall, the strategy has to be ‘Buy on Dips’ with an investment horizon of 18-24 months,” he adds.

On the other hand, Aamar Deo Singh, Senior VP-Research of trading firm Angel One, says the upward trend is likely to continue for some time as the markets are expecting a cut in the US interest rate in September, which could attract foreign investments into domestic equities. “Any move otherwise could lead to profit-booking and corrections. Investors need to be prepared for increased volatility ahead of the US Presidential elections.”

Amid increased volatility, investors should maintain caution and fasten their seat belts as the ride is likely to get rough in the near term.

@iamrahuloberoi