Decline in Vix signals calmer markets in 09

Written by Markets Bureau | Mumbai | Updated: Dec 31 2008, 08:22am hrs
The volatility index of Indian stock markets, or the Vix, has eased off to around 40%, from a stratospheric 90%, as the year draws to a close. This is the most significant indicator of calm returning to equity markets, where investors are hunkered down for the long haul, but do not expect any more sudden shocks sending indices crashing further. The Vix, often dubbed the fear index, is a measure of how volatile the bourses believe S&P 500 stock prices will be in future.

To get a feel of the change, compare what happened within hours of the collapse of Lehman Brothers on September 15: the Vix climbed to a nervous 63% within the day. As panic set in in US, EU and UK markets, the domestic Vix remained consistently above 60% and, even until last month, remained at an anxious over 80%. Confirms ICICI Securities senior VP TS Harihar, The Vix coming down to 40% levels does indicate that things will remain stable.

Its been a large climbdown for the Vix. The index started rising from mid-September and was at 85%-plus levels throughout October and November. A Vix above 70% depicts fear and panic in the market and, clearly, this has abated.

The market usually bottoms out when the Vix reaches about 30%, says Harihar.

There are reasons for the easing of the Vix. From September through November, foreign institutional investors (FIIs) had pulled out of emerging markets like India to meet redemption pressures in their own markets. But six months after being net sellers, they turned net buyers in December, making net purchases of equities worth Rs 1,625 crore. Overall, they have net sold equities worth $11.49 billion in calendar 2008.

The trickling back in of funds from overseas investors also created pressure on some short sellers who had taken wild bets on the markets tanking. October saw a record Rs 15,347 crore net sold by FIIs and another Rs 8,278 crore in November. With the positive inflows, many speculators were seen covering their positions in December.

Now, there are no substantial position build-ups, reckons a trader with an overseas firm. RBIs rate cuts and the governments fiscal stimulus package earlier this month have also helped. That inflation fell far below expected levels added to the change in complete negativity, says a fund manager. All these created a base for the market and things look rather stable at the moment, he feels.

Consequently, the rupee has strengthened to about 48 to a dollar. It had lost almost 25% this fiscal to breach the 50 mark. Hence, the market is also finding support at lower levels, which in plainspeak means investors are buying shares, albeit carefully. The levels have been pegged at 9,300 for the BSE Sensex and 2,700 for the broader NSE Nifty.

Technical analysts are also predicting that markets would remain stable into the New Year and that there is strong support for indices at lower levels. Ashish Shroff, technical analyst with Ambit Capital, says, In the medium term, according to technical charts, we expect the Nifty to witness a decent pull back from current levels and target 3,800 in the next six to eight months. Therefore, any declines from current levels would be a good buying opportunity over the medium term.

Looking ahead, experts reckon that there would be a correction in January when corporate results are expected to be released. Most analysts expect a poor performance from India Inc. Moreover, lower interest rates and another stimulus package from the government are expected to cushion the market from the huge volatilities seen in October and November.

The corporate earnings could bring about a correction in the market. And, the narrowing of the spread between government bonds and corporate bonds will signal that credit is flowing into the market and this will be a positive signal, says Anup Bagchi, executive director with ICICI Securities.