Traders are piling into stocks, shrugging off worries about rising Covid-19 infections and betting on a speedy financial restoration, at the same time as a gentle stream of information factors in any other case.
If India’s fear-gauge, the India volatility index (VIX), is any indication, the panic over the pandemic and its fallout on the economic system is formally over. The index has cooled off sharply from the March highs through the market rout and is hovering round a six-month low. It has plunged 76% from the highs of 86.64 touched on March 24 when inventory indexes crashed greater than 10% in a single day. A fall within the VIX index signifies traders’ concern a few sell-off in equities is ebbing.
The index’s motion is in sharp distinction to India’s financial fundamentals and earnings development. Economists are predicting GDP to shrink between 5% and 9.5% this 12 months, the most important contraction since Independence. But towards this bleak backdrop, Indian stocks have gained 50% from the lows in March. With an infinite quantity of liquidity sloshing across the international monetary system, traders are disregarding the seeming disconnect between inventory costs and company earnings.
“There may be a lot liquidity within the system, within the international economic system; that’s why the inventory market may be very buoyant and it’s undoubtedly disconnected with the actual economic system. There will certainly be a correction, however we are able to’t say when,” Shaktikanta Das, governor, Reserve Financial institution of India, mentioned in an interview. Low volatility displays confidence amongst traders that there gained’t be a deep sell-off, at the same time as markets are 8-9% off the report highs in January.
Analysts mentioned traders’ notion of danger is falling as equities are steadily rising from report lows in March this 12 months.
“The numerous decline within the VIX could be attributed to complacency out there to some extent,” mentioned Gaurav Ratnaparkhi, a senior technical analyst at Sharekhan by BNP Paribas. One of many key causes fuelling the present rally is gushing international portfolio funding inflows into India fuelled by low-interest charges in economies such because the US, the place the cornerstone of financial coverage is to maintain pumping liquidity to maintain the securities market from collapsing.
Analysts mentioned the risk-reward calculation for Indian stocks is popping unfavourable and international liquidity is essential to maintain the rally going. “Whereas FII (international institutional investor) inflows in August have been sturdy, web institutional flows may decelerate as markets might consolidate close to time period since massive sectors led by financials await readability on quantum of NPAs and mortgage restructuring and IT, telecom, pharma sectors now supply restricted room for upside,” mentioned analysts at BofA Securities in an August 19 observe.