In volatility, India’s bested peers

In the olden days, rites of passage into adulthood included a test of courage such as hunting lions or wrestling crocodiles.

Today, young people could well try their mettle in the stock market. A more ferocious adversary there never was.

Indeed, going by data from the Securities and Exchange Board of India, India has been the most volatile among major global markets over the past year. The data, which examines the average difference between the highs and the lows of key indices over the last 12 months, puts India ahead of even crises-ridden US and UK markets in terms of volatility.

Volatility is a measure of how much the price of traded securities fluctuate. The more volatile an instrument, the more risk it is said to carry.

The benchmark index of the Bombay Stock Exchange showed an average daily volatility of 2.48% in the 12 months starting November 2008. This was only slightly lower than the 2.79% recorded for calendar year 2008, indicating that a recovering market can swing just as wildly as one in the grip of bears.

Most other major developing markets fared better on the volatility count. China had a volatility of 2.11%, while Brazil recorded 2.4%, Mexico 1.98%, South Africa 1.95% and Malaysia 0.92%.

Among the developed markets, the Hong Kong HSI had the highest volatility at 2.39%. The US, France and Japan had volatility in excess of 2%; Singapore was at 1.88%; UK at 1.81% and Australia at 1.57%.

A lot of the volatility over the last two years can be attributed to the see-sawing of markets as global economies groaned under the weight of sub-prime mortgages.
After hitting a high of 20873.33 in January 2008, the Sensex entered a bear phase that lasted a little under 14 months. At the height of the crises, it had fallen 60.9% from the high on March 9 to 8160.40. Since then, it has risen 112.74% to 17360.61.

Things were more stable prior to the meltdown —- 2005 was the least volatile at 1.08%; 2006 recorded 1.63% and 2007 weighed in at 1.54%.

Market experts believe the volatility will remain, even when there are upmoves.

“The volatility will be there, but the buoyancy will remain,” said A Balasubramanian, CEO of Birla Sun Life Asset Management Company.

More importantly, say experts, investor enthusiasm for India will continue.

According to a report by Religare Hichens Harrison, a part of Religare Enterprises, the growth in emerging markets will not be uniform, but would depend on existing and emerging fundamentals of individual economies, and India is likely to stand out.

“India will become a standalone asset-class rather than being a part of the EM (emerging market) portfolios of foreign investors,” the report said.

Major competition for foreign investment will come from China, which incidentally has bested peers by a wide margin in terms of average daily returns. The Chinese markets gave an average 2.23% in the past year, compared with 0.2% each for India and Brazil.

All other markets underperformed the three, with the US and France giving the worst returns at 0.01% and the UK delivering 0.05%.

Going by the Religare report, India may eventually start to outpace China’s growth, partly due to the latter’s overdependence on exports and partly because of its ageing population. “Both India and China should be converging to a growth rate of ~8% in five years. While
India will continue to reap demographic dividends, China will soon peak out on this account,” the report said.