Watch out for Events that can Cause Market Turbulence


Indian stock market has been on a steady uptrend during the past seven months with occasional shallow corrections. All corrections were opportunities to buy, and the Sensex and Nifty appreciated by around 25 per cent since the February lows. Mid and Small cap indices out-performed. This trend may change. The market is likely to witness a much higher level of volatility, going forward.

Which are the events likely to cause volatility in markets?

An escalation of tension at the border cannot be ruled out. Also, prolonged engagement in J&K can cause fiscal strain too. Another major event is the US presidential elections. Presently, it is a closely-contested election. A Donald Trump victory can cause flutters in the global financial markets. The problem in the European banking sector is another concern, though mild. The US Justice Department’s decision to impose a fine of $14 billion on Deutsche Bank led to concerns about the Bank’s solvency and its impact on European banking and global financial markets. Another major event that the global financial markets will focus on will be the outcome of the Italian referendum scheduled for December. Since the Italian President has declared that he will resign if his party doesn’t win the referendum, market players are anxious about another bout of political uncertainty after Brexit in another major European country. Then, of course, there is the Fed rate hike expected in December.

Since the gush of liquidity is strong and economic conditions in India are steadily improving, it is quite possible that our market may climb all these walls of worry.

Corrections triggered by events are likely to be met with renewed strong buying since the global financial system is awash with liquidity. It is important to note that one third of bond investments globally (around $ 13 trillion) are yielding zero or negative interest rates. In the absence of assets with reasonable yields and with inflation and interest rates in the developed world expected to remain low for an extended period of time, stocks, particularly in emerging markets, will continue to attract funds. Whatever be the short-term volatility, there will be plenty of long-term opportunities springing in the markets.

Any of the events discussed above may lead to sharp correction in the market. If that happens that would provide an opportunity to buy. Presently, mid and small cap stocks are highly valued. There is margin of safety only in large caps. Therefore, sharp corrections would be opportunities to buy large caps. In the large cap segment, prospects of private sector banks look very good. Particularly, private sector banks with lower corporate loan exposure and larger retail loan exposure are likely to do very well. Private sector banks are increasing market share at the expense of PSU banks, which are groaning under the burden of non-performing loans. Since banking is a play on the economy, banking sector is likely to grow on a sustained basis for a long period. Investors will reap rich rewards in the long run.

(The author is Investment Strategist, Geojit BNP Paribas)