Stock market crash: Gold, VIX and yield moves hint bear grip weakening

A tumultuous week in Indian equity markets on global concerns like Fed tightening monetary policy and geopolitical tensions have made bears roaring in excitement. Nifty 50 has made a swift correction of approx. 1,300 points since January 19. Feeding on fears, bears have tightened grip in other markets too. On Tuesday, Japan's Topix plunged 10% from its September high.

Amid tightening bear grip, how feasible would it be to follow the ‘Buy on Dip’ philosophy that has paid handsomely to investors and traders in the past one decade?

After speaking with market participants and assessing certain indicators, Fortune India believes that near term correction is over and the market is poised for an upmove. Let us examine these indicators:

Volatility Index (VIX)

After a spike of 40% in the last one week, the Volatility Index (VIX) has stabilised on Tuesday. At the time of filing this report, VIX was sporting at 23, just 0.18 points above Monday's closing of 22.82, showing receding fears among market participants. On Monday, VIX moved up by 21%.

Institutions and retail investors use derivatives like Future and Options to hedge their cash positions. In the Option pricing formula, volatility is a key input. Thus, with higher volatility, the premium of Options moves up making hedging a costlier task. Also higher VIX brings wild moves in the Index. Thus, VIX stability hints stability in Index and rising confidence among market participants.

Gold Prices

During global turmoil gold prices move up while risk assets like equities move down. For instance, between January 2020 and March 2020 when Covid-19 first wave spread, gold prices (10 gram) moved up from ₹39,108 to ₹44,906, an approx. 15% upmove. In the last two months, MCX Gold prices have hardly moved up. In November 2021, gold made a high of ₹49,610 and currently it is quoting lower than November high.

Market participants believe that if Russia-Ukraine tension boils up then gold may breach the all-time high of ₹56,191 made in August 2020. Gold prices below the recent high of November indicate that market participants believe that geopolitical tension will recede in the coming weeks.

US 10 Year Bond Yield

Investors are in a tizzy as the Federal Reserve is on the cusp of tightening monetary policy. Treasury yields, particularly the 10-year yield are seen as being reflective of investor sentiment about the economy.

Last week, the 10-year bond yield made a top of 1.9% and at the time of filing report it was quoting at 1.755%.

Lower 10-year yield on Monday helped US equities to stage a remarkable comeback. The Nasdaq Composite Index (COMP) finished in positive territory, up 0.6% in a whipsaw session, after being down by as much as 4.9% at Monday’s nadir, with that turnaround marking the largest comeback to end in positive territory since October 10, 2008, according to Dow Jones Market data.

Speaking with Fortune India, Sushil Kedia, founder and CEO, Kedianomics points out most of the global concerns are factored in as neither US bond yields are inching up nor gold is making a new top.

“The prospects for new all-time highs further in all equity markets worldwide remain bright and may be now it has become a lighter task for all stock markets, given a lot of risk has become uncrowded,” he says.

Kedia says the Indian market will make a new high after the budget. “I do not remember any single budget in the last 40 years where markets continued to decline after the budget if they were already in a sharp fall before the budget,” he adds.

Structure Of Indian Equity Market

The Indian equity market is largely a promoters driven market as promoters own up to 56% of Nifty 500 companies' equity. At the end of FY21, institutional investors owned 26.83% of Nifty 500 companies as per Institutional Investor Advisory Services India report.

Market participants believe that over three quarters of institutional holding is held by sovereign and pension funds and insurance companies. With around 80% of equities held with promoters and long-term investors, Indian indices have not seen massive (over 20%) correction in the last one decade except the February-March 2020 fall due to Covid-19.

In 2021, Foreign institutional investors sold Indian equities worth ₹93,510 crore while in the first three weeks of 2022, FII net selling stood at ₹15,563 crore. Despite heavy selling by FIIs in 2021, the market moved up from sub 14,000 to over 17,000 indicating that Indian equities have primarily been now owned by long only funds which offer stability to markets.

Improving Fundamentals And Stellar Performance By Financials

Corporate India has witnessed a massive deleveraging that has made equities more appealing for investors. Corporate India has reduced its net debt (gross debt minus cash) by about 30% and gross debt by 17% in FY21. As per Capitaline data, 750 companies have reduced gross debt by ₹3 lakh crore to ₹14.7 lakh crore in FY21 from ₹17.71 lakh crore in FY20.

Corporate profit zoomed from ₹3.17 lakh crore in FY20 to ₹4.2 lakh crore in FY21, as per Capitaline data. In the first half of the current financial year (till Sep 30), Nifty stocks have clocked ₹2.85 lakh crore of net profit and if the trend remains the same then it may create a new record of over ₹5.5 lakh crore of record earnings.

Even profit margin of Nifty companies has drastically improved. Trailing 12 month profit margin of Nifty companies moved up from 8.26% in the September quarter of FY20 to 11.36% in the September quarter of FY 22. Despite Covid-19, financials have registered 18.52% growth in net profit between FY20 and FY21 which shows the strength of the sector.

Market is expecting a stellar performance from financials and information technology that hold 37.5% and 18% weightage respectively. These two sectors combined are more than half of Nifty weightage and corporate earnings from these two sectors are meeting street expectations.

According to Bloomberg Street consensus estimate, the financials are expected to have a 23-24% compounded annual growth rate (CAGR) between FY20 and FY24, with a share of about 31% in FY24 by Nifty companies’ earnings. For the record, in FY21, Nifty’s profit stood at ₹4.2 lakh crore and financials share in it was ₹1.2 lakh crore. By FY24, the street is expecting financial profit to more than double and touch ₹2.35 lakh crore.

Seeing the brighter prospect of the Indian market along with improving fundamentals, any decent fall in equities is a best time to buy.