Markets brace for new round of turbulence

The Sensex ended 173 points lower at 39,749.85 while the Nifty50 index ended at 11,670.80, down 59 points, as rising novel coronavirus cases in Europe coupled with uncertainty over the US presidential election spread jitters through the Indian market.

These factors will likely keep India’s equity market volatile along with the rest of global markets in the near term, deterring investors, analysts said.

In October so far, India’s volatility index (VIX)—also called the fear index—has spiked 20%, indicating investors expect further corrections, taking cues from historical correlations of global markets with a Democratic or Republican victory in the US, either of which has shown to impact market sentiment in a distinct manner.

Analysts said volatility will likely rise in the run-up to the closely fought November 3 election, till a clear winner emerges. The pandemic may also have a bearing on market performance post election, experts said.

“Historical analysis reflects that, typically, post a crisis, the first six months of a new President witnesses a contraction in equity markets of about 10% vs a contraction of 4% for Presidents that do not follow a crisis. Therefore, some market correction cannot be ruled out and one must hedge the portfolio,” said analysts at Edelweiss Broking Limited. As the US economy opens up, investors are expected to add exposure to the recovery plays in equities and may keep a mild pro-cyclical stance. Analysts expect positive returns from equities on support from ultra-loose monetary policies by major central banks.

“The key issue for financial markets in the next several months is not who wins the presidential election, or the state of US-China relations, but how the Fed reacts to the cyclical return to normal. As for the other global central banks, they will most likely follow the path set by the Fed,” said Christopher Wood, global head (equity strategy), Jefferies.

India remains the top performer in October among global peers as benchmark indices Sensex and Nifty rallied over 3% in dollar terms. In the same month, MSCI World declined around 3%. Analysts at Credit Suisse Wealth Management India said equity markets are expected to remain volatile ahead of the US presidential election.

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