By Mahavir Kaswa
Financial markets around the globe have had a tough begin in 2022. Equity indices are tumbling from all-time highs and bond yields proceed to pattern upwards. Central Banks have begun elevating charges and are tightening the provision of “easy money” to fight the woes of rampant inflation. The Russia-Ukraine battle and lockdowns throughout main cities in China proceed to trigger supply-chain disruptions and have solely added gasoline to the fireplace. The inventory markets in India have seen heightened volatility as effectively which has made traders uneasy after an incredible bull run during the last ~2 years.
VIX – the “fear gauge” of the market
The India VIX – popularly referred to as the “fear gauge” of the Indian inventory market – is a measure of the anticipated volatility of the market within the close to future. A excessive stage of VIX signifies extra uncertainty (or concern) available in the market whereas a low stage of VIX signifies much less uncertainty. It breached the extent of 30 on 24-Feb-2022 for the primary time in almost 2 years, signalling that traders have been essentially the most “fearful” because the Covid-19 pandemic. India VIX has since averaged 22.4, staying considerably above its long-term median worth of 18.3.
Historical knowledge going again to 2008 means that the markets turn into more and more turbulent at any time when VIX spikes over 30 (~87th percentile). At first look, it might appear rational to be fearful in such conditions. However, knowledge exhibits that the fairness markets are inclined to bounce again shortly after intervals of heightened volatility.
Equity markets bounce again shortly
To higher perceive this, we checked out how Nifty 500 TRI carried out over the subsequent 12 Months when India VIX was above the extent of 30. There have been 468 such buying and selling days during the last 14+ years, and in 428 of those events (91%), the Nifty 500 TRI delivered constructive returns over the subsequent 12 months. It tells us that though the fairness market could also be plagued with uncertainty in turbulent instances reminiscent of this, they have a tendency to bounce again shortly. The scatter plot beneath gives a visible illustration of this info the place we will clearly see the overwhelming majority of 12-month ahead returns being higher than 0%.
To get a clearer image, we in contrast the 6-month and 12-month ahead returns throughout these extremely risky days (India VIX > 30) with the rolling returns over your complete historical past obtainable.
Looking on the median values, which remove the influence of outliers, we will see that the Nifty 500 TRI has traditionally delivered over 3x greater returns over the subsequent 6-months at any time when India VIX spiked above 30. Similar inference might be drawn from the 12-month ahead returns, which present greater than 2x greater returns when VIX hit above 30.
In conclusion, traders needn’t panic and provides in to the concern in risky markets. History exhibits that fairness markets are inclined to bounce again comparatively shortly after intervals of heightened volatility. Therefore, traders might profit from specializing in “finding calm in the midst of chaos” and sticking with their long-term investments of their journey of wealth creation.
(Mahavir Kaswa is the Head of Research, Passive Funds, Motilal Oswal AMC. Views expressed are the creator’s personal. Please seek the advice of your monetary advisor earlier than investing.)
Source: www.financialexpress.com”