Markets To Remain Hyper- Volatile Ahead Of Budget

Stock markets are expected to turn hyper-volatile during the week starting January 25 after remaining volatile for the week ended January 22.

The trading week ahead will be a truncated one, the first of the year, as markets remain closed on Tuesday (January 26) on account of Republic Day. It will be the last one before the budget is presented on February 1.

The NSE Volatility Index has moved up slightly ahead of the union budget. It was placed at 22.4 against 20 in the previous two weeks.

Rusmik Oza, Executive VP, Head of Fundamental Research at Kotak Securities expected volatility to remain high next week due to a combination of all three factors — a truncated week, last before the budget and F&O expiry scheduled on Tuesday.

A persisting rise in infection from the new strain of COVID-19 virus has intensified restrictions in Europe, the UK, and Hong Kong, impacting global markets.

According to Shrikant Chouhan, Executive VP at Kotak Securities, the continued upswing in the market pushed valuations to their highest since the Global Financial Crisis (GCF) of 2008.

"Markets are likely to react positively to Reliance Industries' (RIL) quarterly results in Monday morning trades and remain volatile for the next couple of weeks," he said.

Hemant Kanawala, Head – Equity at Kotak Mahindra Life Insurance said that the risk-return equation did not look favourable in the short term. He didn't rule out an interim correction, either. However, he was of the view that structural support in terms of earnings visibility continues to hold.

The correction last week is expected to continue further as the market was in an overbought condition. It would be prudent to book profits at higher levels. The Sensex breached the psychological mark of 50,000 level on the upside but immediately retracted and closed the week at 48,879. Nifty too followed suit and closed at 14,372. Both the measures ended the week with fractional set back.

Strong data points on the economy (power demand, GST collections and Auto sales) and the launch of the country's mass vaccination drive improved sentiments.

The sharp recovery in the market from its March 2020 lows was due to faster than expected recovery in the Indian economy. Factors like COVID situation coming under control sustained liquidity by the foreign portfolio investors (FPIs), and continued stellar performance by Indian companies even in the quarter ended December 2020, contributed heavily.

FPI flow was decent at Rs.6,900 crore in the first four days of the past week. Selling by Domestic Institutional Investors' (DIIs) witnessed some moderation at Rs 2,145 crore in the same period. In 2020 FPIs pumped in $ 23 billion into the Indian equity markets. Strong FPI equity inflows continue in January 2021 with net inflows of around Rs 24,500 crores ($3 billion) so far. The debt segment, however, saw some marginal outflows.

Significant factors that drove FPI flows were abundant global liquidity and abysmally low-interest rates in the developed world. A market consensus that the leading central banks' ultra-loose monetary policy would continue in 2021 added to the trend. This consensus was strong, and inflows are expected to remain healthy.

In particular, inflow into India is expected to remain robust since the economy is staging a V-shaped recovery and corporate results are surprisingly better than expected.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services said: "This trend of FPIs buying heavily in Indian markets is likely to continue even though valuations are high and occasional bouts of profit bookings can happen. High delivery based buying in IT, telecom and private financials indicate FPI preference for these segments."

Commodity inflation could prove to be a spoilsport. Prices of necessary industrial raw materials like iron and steel, copper, cement and others have been rising. This has been resented even by the government. The union minister of transportation and highways, Nitin Gadkari, also complained of cartels prevailing in the commodity sector, taking advantage of the current situation for over profiting. This swift price rise may pinch the profitability of corporates going ahead.

Technical charts also indicated that volatility would continue going ahead. It seemed the Nifty has started to feel the turbulence, as it was already trading in the overbought zones.    

Nirali Shah, Senior Research Analyst at Samco Securities said: "If Nifty breaks below the 14,200 mark during the trades in next week or in the short run, which is its immediate support in the short term, it can trigger a huge profit-booking move to 13,100 on the downside".

It would be interesting to see that the previous phase and the current phase coincide, which hints that a bigger correction could play out this time.

"Hence, traders are suggested to be light on the long side. The key trigger would certainly revolve around high hopes from the union budget, which may set the mood for markets. Investors are advised to keep an eye on these major events and refrain from aggressively investing fresh funds. Investors should play safe as markets have become very risky and overvalued in the short term" Shah cautioned.