2017, the year of fewest market corrections

Benchmark Nifty has posted declines of over 1% only on six occasions this year

Investors went into a tizzy when the benchmark indices fell less than two per cent on Friday, and after the stocks extended the fall by another one per cent on Monday. Corrections of this magnitude are considered “business as usual”, but not this year.

So far in 2017, the benchmark Nifty, a gauge tracking the movement of the country’s top 50 stocks, has fallen one per cent or more only on six occasions. The trend is not restricted to just India; the Dow Jones index, a gauge for the top 30 US stocks, has posted over one per cent fall only on four occasions.

To put this in perspective, in 2007, the peak of the bull market for global equities, the Nifty and Dow Jones had 41 and 30 trading sessions, respectively, of one per cent or more declines.

“Low volatility this year has existed the world over. This is one of the biggest concerns,” said an equity strategist with a global brokerage, requesting anonymity. “Long period of low volatility can be followed by a meaningful period of high volatility as there is a mean revision.”

The India VIX index, a gauge for short-term market volatility, has largely moved in a narrow band between 10 and 14. The index has surged 15 per cent in last two trading sessions, despite that the current reading is just 13.34. (Higher reading signals high expected volatility).

Last year, the index had seen several spikes and had breached the 20 mark when the markets faced uncertainties such as the Brexit vote, a referendum to decide whether Britain should stay in the European Union, or the closely fought US presidential elections.

Analysts say one of the key reasons behind low volatility this year is the lack of big uncertainties.

“An increase in volatility was witnessed during the Euro Zone crisis, yuan devaluation amid China slowdown concerns, and the end of quantitative easing. This year we haven’t been faced with any of such events,” explained the head of research with another foreign brokerage. “Also, the global central banks, particularly the US Federal Reserve, have been following a mantra of keeping market volatility in check. This, too, has helped insulate the market against sharp corrections.”

Although, the sharp market declines have been fewer this year, it hasn’t translated into exorbitant gains, at least for the benchmark indices. The BSE Sensex is currently up 18.8 per cent and the Nifty has advanced 20.6 per cent so far this year.

Market players say volatility is necessary for better price discovery. Historical low volatility this year could have distorted the price discovery, they add. A lot of analysts have been surprised by the market charge this year amid lack of earnings support and slowdown in the economy.

“If the market fall is artificially suppressed, it is bad for the market. However, that’s not the case for low volatility this year. One can say volatility has been lowered to some extent due to restriction on participatory notes (p-notes) from taking naked positions,” said the strategist quoted above.

In July, market regulator the Securities and Exchange Board of India (Sebi) had barred p-notes from taking unhedged positions in the derivatives market.

Another structural factor for low volatility this year has been strong buying by equity mutual funds (MFs). Equity fund managers have emerged as strong buyers whenever the market has seen a steep correction during intraday trading, helping stage a recovery. It was demonstrated on Monday as well. The Nifty index had declined as much as 1.4 per cent but recovered to end just 0.9 per cent lower amid strong buying by domestic funds.

Analysts say days of ultra-low recovery could be over given the headwinds such as trimming of balance sheet by the US Fed, ongoing tensions between North Korea and the US and the impending elections in China.