Asia's Most Volatile Market Braces For More Swings As Earnings, Budget Loom
The equity markets have extended their record surge this year, with the benchmarks hitting fresh life highs for over 40 times this year.
Indian stocks topped the volatility charts in Asia last month, mostly driven by political uncertainty. Now they are expected to see another spell of heightened volatility as traders shift focus to the financial results for the June quarter and the Union Budget.
The 30-day volatility of benchmarks in Asia showed that India's indices— NSE Nifty 50 and S&P BSE Sensex — were leading the pack with 24.53% and 24.23% respectively, according to Bloomberg data. The Nifty was the sixth best-performing index during the year.
Volatility in Indian benchmarks has been on a downward trend since the Bharatiya Janata Party tied up with key allies to secure a third term, ensuring policy continuity. But market swings can return soon as India gears up for its Budget and with the quarterly earnings that recently began with the information technology majors.
There are high expectations around the Budget, the earnings season and the policies of the Union government, according to Kranthi Bathini, director of equity strategy at WealthMills Securities Pvt. "All these high expectations are definitely going to create some volatility going ahead."
On June 4, the India VIX — the implied volatility based on India's options contracts — surged over 51% to 31.7, the biggest intraday jump since Aug. 24, 2015, on fears of political instability after the BJP failed to bag a majority in the Lok Sabha elections.
The market sentiment is extremely bullish, backed by decreasing short bets by foreign institutional investors. In the next few days leading up to the Budget, the index and the overall market might remain volatile as investors readjust their positions, according to Rupak De, senior technical analyst at LKP Securities. "Additionally, the quarterly earnings of Indian companies might add to the volatility."
The markets have begun the earnings season on a very positive note. IT stocks are taking the lead right now because valuations look relatively attractive, Bathini said.
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Market, Sectors Likely To Remain Abuzz
The Budget on July 23 can weigh strongly on investors' sentiments with its continued focus on infrastructure and an additional boost to improve the consumption sector.
The government is considering consumption-boosting measures worth more than Rs 50,000 crore in the upcoming Budget. For the first time in seven years, tax cuts for lower-income individuals are part of the Modi government's first Budget in their third term. These measures could provide a strong case for the markets to move higher in the second half of the year.
The market and sectors are likely to remain abuzz from the next few days up to a few days after the Budget, De said.
This time, the Budget might be populist, which is likely to give the market more reason to remain bullish rather than bearish.Rupak De of LKP Securities
The equity markets have extended their record surge this year with the benchmarks hitting fresh life highs for over 40 times this year. After logging in the best monthly performance in June, Nifty and the 30-stock Sensex, have logged in a return of 1.5% and 1.31% so far this month.
On a year-to-date basis, both gauges have given a return of 12.7% and 11.5%, respectively.
During this year, investors have shrugged off the growing concerns of froth build-up in the broader market as the BSE SmallCap has bagged a return of 26.5%. Having risen by 29% this year, the BSE MidCap market capitalisation looks poised to surpass the $1-trillion mark in the near term.
Deadly Combination
The current market is witnessing positive sentiments from both domestic and overseas investors. Good sentiments, aided by strong gross domestic product, positive earnings and tax collections are coupled with strong liquidity in the market, according to Bathini. "It's a deadly combination."
On the higher end, 24,700 looks like immediate resistance and a decisive move above 24,700 might take Nifty towards 25,000–25,500, De said. "On the other hand, a fall below 24,200 might trigger panic in the market."
Incidentally, Pakistan has topped its Asian peers in terms of its year-to-date returns, mainly on cheap valuations and improving economic conditions. The KSE 100 has seen a rise of 31% this year to outperform all other Asian markets, followed by Taiwan's Taiex and Sri Lanka's benchmark.
