Will 2019 Be A Year Of High Volatility?
The small and mid-cap benchmarks tumbled last year but volatility was nowhere near alarming for Nifty 50.
The Nifty Smallcap 100 Index dropped 29 percent and the Nifty Midcap 100 Index declined 15.4 percent in 2018. The Nifty 50 plunged 15 percent in August-October after the defaults by Infrastructure Leasing & Financial Services Ltd. dried up capital to non-bank lenders and triggered fears of a contagion. But it ended the year with 3.2 percent gains.
Data shows that 2018 was largely as normal as 2017 or 2016 for the large-cap benchmark.
Nifty 50’s return distribution for the last nine years revealed that a weekly fall of more than 3 percent is higher than one standard deviation.
The statistical analysis shows:
- Since 2010, there have been only 33 instances when the Nifty 50 recorded a weekly fall of more than 3 percent. That’s once-a-month event. Yet, 2017 saw only one such instance and 2018 had two.
- There were only 22 instances of a monthly fall of more than 3 percent in the past nine years. Statistically, this is once in two months event. Still, 2017 saw no such occurrence while 2018 recorded four: two each in February-March, after the finance minister introduced a long-term capital gains tax on equities; and September-October when IL&FS defaults spooked the financial markets.
That doesn’t suggest volatility was high for the benchmark gauge last year. And another data set only confirms the view.
A box plot—which highlights the degree of dispersion, skewness and outliers in a dataset—also revealed that last year wasn’t much different from the previous one.
The median of India Volatility Index was around 14 percent for 2018 compared with 12 percent the year earlier. Also, there were no outliers in 2018.
The Indian market, however, may not stay calm for long if early signs from the U.S. stocks are to be believed. U.S. volatility’s 50-week moving average has crossed the 200-week reading. The pattern, called the Golden Cross, suggests that index is expected to rise. When volatility spikes, prices tend to go down. And when the U.S. stocks tumble, they drag global markets along.
And while nervousness hasn’t crept in, a $52-million trade on Nifty options suggests that someone is looking to protect equity holding against a fall of more than 5 percent from the current levels in the election year.
Moreover, India VIX showed a spike in 2014—the year of the last general election. So, it may not be safe to construe that the absence of evidence means 2019 may also see low volatility.