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 government’s 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 dollar’s strength against a basket of six currencies, has declined 5% from its 2012