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Published on: Dec. 13, 2021, 11:05 p.m.
Riding volatility, the smart way
  • Volatility in stock markets is akin to surfing and many a time, catches even the seasoned investor off-guard

By Daksesh Parikh. Executive Editor, Business India

Surfing is not for the fainthearted at the best of times. Newcomers normally do not get into uncharted and treacherous waters, despite the attraction of riding the waves. Volatility in stock markets is akin to surfing and many a time, catches even the seasoned investor off-guard. Surprisingly, in the year 2021, investors have come out pretty much unscathed during the recent swings witnessed on the bourses. 

Indian markets have seen a fair number of swings (measured as the percentage difference between the highest and lowest end of the market during the daily session) over the years. It is by no means an abnormal phenomenon. Investors, including new ones who have come during the pandemic, are getting used to this. Since 1 January 2021, out of the 233 trading sessions till 9 December, the market has seen more than 1 per cent intraday swings in 128 sessions. Both when the market was moving up as well as during the correction which was witnessed during November.

Out of the 128 sessions which saw a change of more than 1 per cent, only 18 sessions had seen intraday movement of over 2 per cent of which only 2 had been more than 3 per cent. The biggest one was on 1 February, on the day of the budget, which saw a difference of 2,330 points between the highest and the lowest intraday movement. Of course, budget sessions are normally volatile as traders try to get an edge over others and build their daily books according to their perceptions of how the budgetary announcement might influence particular stocks. Moods also swing from sheer exuberance to dismay, depending on the expectations of traders. 

On 26 February, the market swung again – this time by more than 3 per cent. In absolute terms it moved by 1,500 points during the day.  The point is that daily movement of 1 per cent up or down has become the new norm. While the absolute range may rise due to the rise or fall in the index, one has to see the percentage of daily ups and downs. 

November has been an unusual month and has seen more than its fair share of volatility.  Out of the 19 sessions, 13 sessions have seen daily swings of more than 1 per cent, with four sessions seeing swings of more than 2 per cent. The Sensex, in November, was down by 4.2 per cent and closed at 57,065.

In nearly 5 months in calendar year 2021, the Sensex gave negative returns. November saw the largest dip in returns (-4.2 per cent). This was accompanied by an intra-month movement ranging from a high of 61,036 to a low of 56,383 or around 7.6 per cent. 

However, the monthly positive returns during the year have been much higher; August gave returns of 8.8 per cent. The negative returns have brought the volatility in November to the fore. In a rising market there are few concerns, but in the case of a fall, there is widespread anguish. There have been various reasons ascribed to the fall including the withdrawal by FIIs following negative reports by leading firms like Morgan Stanley, UBS and Nomura, amongst others. 

In November the FIIs pressed sales to the tune of nearly Rs40,000 crore on top of nearly Rs26,000 crore in October. While the total sales were high in 2021 in the secondary market, the FII have also been investing heavily in the primary market. Paytm was only one such issue. The total investment of FIIs in the primary market is estimated to be around $5 billion. Till 11 December, as per data collated by NSDL, FIIs net sales exceeded inflows across all markets by Rs18,427 crore.

  • Balasubramanian: no need to panic

Save for November, the markets have been fairly buoyant. To date, the Sensex has given 23 per cent returns. Banks which were shunned a year ago have been rerated by investors, with leading banks like SBI, ICICI and Axis Bank all being rerated, post the pandemic year when fears of NPA had seen investors dumping finance companies shares. What is noteworthy is that private sector banks have trailed the overall banking gains. The private sector banking index has gone up by just 12 per cent compared to 18 per cent returns given by the overall bank index. 

The year has also seen building material (including cement and speciality materials) and metals really give spectacular returns. Tata Steel, SAIL, JSW Steel, Hindalco have given returns ranging between 80-100 per cent over the last one year. Riding on the China plus 1 policy adopted by several nations and the expected demand surge due to huge infrastructure demand, metal prices have remained at elevated levels. 

Investors who have seen huge gains across sectors were a little bit concerned over the massive selling undertaken in October and November by FIIs. Is the market undergoing a directional change or is this mere profit-taking? What are the chances it will recover and if it does what should the investor do to counter volatility? 

Investors’ dilemma

Earlier, FIIs had a big say in influencing market trends. This is no longer true as domestic institutions, LIC and mutual funds, aided by retail investors, have become an independent force with which to reckon. Many a time the DIIs end up playing bull to the FIIs, who press sales in the secondary markets. 

There is a continuous tug of war between the FIIs and the DIIs as also individual investors. The latter continue to remain bullish on the markets as is evident from the smart rise in the AUM of mutual funds. In November, it touched a record high of Rs11,000 crore with the total investments in the eight months of FY22 (April-November) totalling to Rs78,000 crore as against Rs63,000 crore collected in the corresponding eight months of FY21 and a total of Rs96,000 crore in FY21. 

The new fund schemes floated by mutual funds have been a big draw amongst investors. SBI Balanced Advantage fund which had come out with an NFO in August and September has seen its AUM cross Rs20,000 crore. Its other scheme, SBI Hybrid Fund, also met with a good response and is now nearing Rs50,000 crore. Seeing the overwhelming response from investors across the country, several fund houses have floated balanced advantage funds.

NJ Mutual Fund, a new entrant which got a licence in April 2021, collected Rs5,200 crore. ICICI, LIC MF, HDFC and Axis have also had new fund offerings in the last quarter. The total AUM of mutual funds has gone up to Rs36 lakh crore from Rs30 lakh crore last November. Going by the increased allocation to MF, investors seem to be unfazed by FII sales.  

  • Chandok: it’s a stock picker’s market

    Chandok: it’s a stock picker’s market

Says Ajay Garg, founder and MD of Equirus Capital: “The mood is buoyant and there is no stress visible in the markets.” Garg is not too perturbed by the FII sales over the last few months. He says, money is being recycled from the secondary to the primary market. One has to take investments in both the primary and secondary market into account to get a clearer view. The allocation of India in the Asia-Pacific market has gone up to 16 per cent from the earlier 9 per cent at the cost of allocation to China which has gone down from 42 per cent to 16 per cent.

Garg points out: “Equity deployment continues merrily. Investors are becoming more mature and are taking a three-to-four-year view. Markets will be range-bound for some time, earnings will catch up and p/e multiples will come down. It is definitely a stock specific market.”  The company, which is running a PMS scheme for small caps (AUM Rs600 crore) says there are still a lot of opportunities in midcap and small caps. With GDP growing at around 8.5-9.0 per cent, these sectors will do well. “One has to spend time in the market, rather than timing the market,” adds Garg.

The problem is that there is a thin line between investments and trading. The rationale of investors, many of whom are newcomers and have made good profits in the aftermath of the pandemic, is simple. Book profits now, rather than take a call for three to five years. Instant gratification is the name of the game here. However, some investors are becoming mature and taking a longer view of the markets. 

“The undertone of the market continues to be quite positive and constructive,” says Vijay Chandok, MD and CEO, ICICI Securities, a listed full-service broking house with a market cap of over Rs25,000 crore. “This undertone is supported by strong corporate earnings and facilitative policies across industries and sectors. Interest rates are also conducive and all these factors augur well for growth and corporate profitability.”

Chandok agrees that there are headwinds, especially on account of the uncertainty shrouding Omicron, the new Covid strain as also the trinity of interplay of factors in the US; Fed tapering, interest rates hike and inflation add to the uncertainty, which could lead to volatility. 

However, he says: “It is a stock picker’s market for investors with a medium to long term view. We tell our investors to do your research and wait for good opportunities to buy in a volatile market. We feel that by the middle of next year we will see the markets touching a new high.”

  • Garg: the mood is buoyant

    Garg: the mood is buoyant

A Balasubramanian, MD & CEO, Aditya Birla Sun Life Mutual Fund, (market cap Rs17,000 crore) is also optimistic about the market. He says: “This is the beginning of a decadal long bull run. The economic activity, post the pandemic has started picking up and one can continue to invest. Investors with a medium to long term horizon need not be too concerned over the swings in the markets. They should stay focussed on systemic investment plans. During a fall in the market, investors should be looking at accumulating good stocks.” 

He points out: “For FII and private equity, this has been one of the best bull runs in recent years. For private equity it is probably the best year in several decades. Profit taking is normal as their performance is assessed on the basis of actual profits generated. FII sales in secondary market have also to be seen in the context of their purchases in the primary market. While December could probably see more profit booking, investors need not be spooked by this phenomenon.” 

With new fintech companies for tracking portfolio value on a day-to-day basis, several investors track the performance of their portfolios on a day-to-day basis and benchmark their performance against various indices, be they large cap, mid cap, small cap or a permutation of these indices based on the weightage of each stock in their portfolio. While this exercise is more suitable for traders, investors have to refrain from such activity. Investors have to remain true to their conviction and cannot put the garb of traders on and off. 

“No one can consistently time or predict the markets, so we do not recommend taking market timing calls,” explains Ajay Bagga, a market veteran who had been earlier associated with several fund houses. “For 99 per cent of investors, the best strategy is three-fold, Keep investing regularly allocating fixed amounts on a regular interval irrespective of the market levels, stay diversified and stay invested.”

Studies have shown that missing out on the top 30/50/100 days of market performance over the last 20 years would lead to missing nearly the entire market move. “Valuations...research shows that investing at high valuation levels leads to poor returns. So, we do not recommend lump sum investments at these elevated levels. However, the SIPs should be continued.”

Bagga is amongst the few who feel that the outlook is not great for the next year. He adds: “There is volatility ahead of the expected tightening by the Fed which in turn usually leads to outflows from emerging markets which in turn leads to the strengthening of the US dollar and the weakening of emerging market currencies.”  Notwithstanding the market movements he feels that India will be the fastest growing major economy next year and the structural reforms undertaken by the government over the last seven years will start bearing fruit. “We suggest investors take a five-to-ten-year perspective and we see Indian markets at 2x and 4x levels of the present levels as a high probability. Stay invested.”

Balasubramanian also shares a similar opinion: “While December could probably see more profit booking, investors need not be spooked by this phenomenon,” he says. 

  • Sarkar: use the corrections

    Sarkar: use the corrections

Each investor should take an independent call based on his risk appetite. While some like to invest and forget in good quality companies, others constantly churn their portfolios, in search of elusive mega profit in their finds.

Says Aniruddha Sarkar, Chief Investment Officer & Portfolio Manager, Quest Investment Advisors, a Mumbai-based PMS service-based provider with an AUM of over Rs2,100 crore: “Investors should use the corrections to shift from expensive stocks in say pharma, IT or speciality chemicals to more promising one like banks which have underperformed over the last year.”

Sarkar says many who have bought shares in a frenzy during the bull run should take a pause and rebalance their portfolios to get into more promising sectors. His reasoning is that if the economy is on a growth trajectory, the finance sector will do well. He explains that traditionally, the finance sector used to outperform the broader index.

The search for the next Infosys or the next Nestle is, however, not an easy task. And the constant churning of portfolios based on so-called market gurus helps no one. A temporary rush of adrenaline may provide some excitement but does more harm to portfolios than staying put. Trading in shares is addictive but investing is a patient game.

Instead of relying on tips and the advice of experts, which abounds on television programmes, more homework done through better research will provide greater satisfaction to investors. In a growing economy, both consumer demand and investment demand will grow and it may well be worth one’s while to keep tabs of companies operating in both sectors. 

With infrastructure sector stocks being beaten down for a long time, investors would do well to look at companies in this sector. For those with a low risk appetite, investing through mutual funds is a better option. Riding volatility in a smart way by expanding exposure to good quality stocks, could help in the longer run. 

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