Risk indicators trend lower, give boost to equity investors

Written by Devangi Gandhi | Mumbai | Updated: Jan 22 2013, 07:42am hrs
Various uncertainty indicators have started to trend lower since the second half of 2012, portraying a favourable environment for equities. Apart from the volatility indices that usually depict the underlying choppiness in the market and, in turn, investor appetite for equities even dollar index and gold, the barometer of market qualms, have been declining in the period. With the European debt crisis having eased, the global economy is on a revival path, which is likely to benefit equity markets across the world as investors take more risks, say experts.

In its latest 2013 outlook report, in which it puts December 2013 Sensex target at 22,500, Deutsche Equities India said that rising risk appetite, along with recovery in the global economy, are likely to drive equity markets. These factors are likely to play a key role, besides governments policy action, it said.

While market volatility continued to decline for most part of the year, the second half witnessed an evident settling after the Greek election results, agreement on the Greece aid and increased central bank easing in both the US and Europe. For example, Chicago Board Volatility index, a benchmark of market estimate of future volatility and, hence, demand for equity protection, fell to a five-and-a-half-year low of 12.46 on Friday. Even India VIX, the non-tradable index on the NSE, is trading near its all-time low of 13.04, implying complacency among traders.

As per Macquarie, the third round of quantitative easing (QE3) has provided enough fuel for the risk-on mode to sustain for long. The recent risk rally is akin to the one seen in early 2009, which, too, was driven by multiple expansions that lasted a few months, said Macquarie in a recent note.

The market composure is also reflected in the way the dollar index receded after the US Federal Reserve assured that it would pump fresh stimulus to boost growth, in August 2012, and post an announcement of QE3 in mid-September. Dollar index, a gauge of the US dollars strength against a basket of six currencies, has declined 5% from its 2012 highs and threatens to lose another 3% on breach of 76.80. Gold, another safe haven in the times of uncertainties, has beheld tepid investor interest in the recent past, as rising risk craving endangers its decade-long bull run.

In its latest Asia-Pacific strategy report, Goldman Sachs said investors are currently under-risked. Following its strategy team's meetings with 200 investors across the US, Europe and Asia, Goldman concluded that while the investors generally agreed with a positive outlook of 2013, they were not fully positioned for it. This gap between views and positioning suggests that a good deal of potential fund inflow could occur as confidence in the growth outlook builds gradually, it added.