Since March, the market has been on a steady uptrend with occasional shallow corrections. All corrections were opportunities to buy and the Sensex and Nifty appreciated by around 25 per cent since the February lows. Mid and Small cap indices outperformed. This trend is likely to change. The market is likely to witness a much higher level of volatility, going forward. The coming days, perhaps 2 or 3 months, are likely to throw up events that can trigger volatility that we have not experienced in the last 7 months.
What are the likely events that can cause volatility in markets?
It is possible that Pakistan might respond to the surgical strikes that the Indian army carried out. If the response leads to escalation of tensions, that will be problematic. Another major event is the US presidential elections. Presently, it is a closely contested election. A Trump victory can cause flutters in the global financial markets. The problem in the European banking sector is another concern, though mild. The US Justice Department’s decision to impose a fine of $16 billion on Deutsche Bank led to concerns about the bank’s solvency and its impact on financial markets. Another major event that the global financial markets will focus on will be the outcome of the Italian referendum scheduled for December. Since the Italian president has declared that he will resign if his party doesn’t win the referendum, market players are anxious about another political uncertainty after Brexit in another major European country. Then, of course, there is the Fed rate hike expected in December. These events and expectations around them are likely to cause heightened volatility in markets.
Since the gush of liquidity is strong and economic conditions in India are steadily improving, it is quite possible that our market may climb all these walls of worry. Corrections triggered by events are likely to be met with renewed strong buying since the global financial system is awash with liquidity. It is important to note that one third of bond investments globally (around $ 13 trillion) are yielding zero or negative interest rates. In the absence of assets with reasonable yields and with inflation and interest rates in the Developed world expected to remain low for an extended period of time, stocks, particularly in Emerging markets, will continue to attract funds. Whatever the short-term volatility there will be plenty of long-term opportunities springing in the markets. Investors should be looking for these opportunities.
Investors should look for major emerging trends to get market-beating returns. For instance, there is a clear trend emerging in Indian banking industry. In H1 2016, credit growth of the nationalised banks is a mere 1.4 per cent while it is 25.9 per cent in the private sector banks. A similar trend is visible is deposit growth also: when the deposits of nationalized banks grew by a mere 4 per cent, deposits grew more than 20 per cent for private sector banks during this period. An increasing focus on consumer lending, away from corporate lending, is another trend. These emerging trends indicate investment avenues that will reward investors handsomely, in the long run.
(The author is VK Vijayakumar, chief investment strategist, Geojit BNP Paribas)