Exuberant markets have to deal with volatility

It’s been a whirlwind January for Indian markets. It almost felt like nothing could take the wind out of the sails of the Indian stock market’s upward trajectory. It all started when a US Federal Reserve (the Fed) official last October said that rate cuts could come as early as March-April. Then in December the Fed officially called out that 3 rate cuts are possible in 2024.Stock markets globally loved this and got on their motorbike in search of a finish line to nowhere. That’s why Indian markets have been testing new highs week-on-week. So much so that even after reporting disappointing Q3FY24 results, stocks like Infosys, TCS and Wipro rose after disappointing Q3FY24 results.Essentially, the markets didn’t care for earnings, news flow, economic numbers, etc. Then came last Tuesday.

The old refrain

There was a lot of talk in market circles that January usually sees Indian markets fall and/or move sideways. Numbers were crunched and conclusions were drawn. But Mr Market didn’t oblige. As we saw, even bad results of blue chip companies were being bought into.Then came last Tuesday.The benchmark indices were at their exuberant best and the Nifty 50 touched a new high of 22,124 by the end of the day’s session on January 16. In the evening, news came in that one of the members of the Fed tried to tamp down on the market’s expectations of a swift rate cut as early as March. Instead, this could be delayed.

HDFC Bank pulled the Nifty down

On Wednesday, mayhem ensued in Indian markets as the Nifty 50 fell over 2%. There are two primary reasons for the carnage in stock markets on Wednesday–HDFC Bank’s Q3FY24 results and the Fed’s caution that rate cuts would take longer. HDFC’s Q3 results were really good in terms of profitability and income growth.But what caught the market off guard was its net interest margin, which is the difference between interest paid on deposits and interest earned on loans. The margin was flat at 3.4% on a quarter-on-quarter basis. The bank’s margin was expected to improve after accounting for the post HDFC-HDFC Bank merger transition. The bank will need to lend more to the SME segment because those assets usually earn a higher interest income.The street is wondering whether the bank will be able to maintain its superior return profile post the merger, considering the bank is going full-throttle opening branches across India. All these worries led the stock to crack 9% on Wednesday. It ended the week down over 11%. Still, the overwhelming consensus on the street is a Buy on the stock.

FIIs play true to form

Another reason markets took a volatile turn was foreign institutional investors (FIIs) doing what they have done in the past during January. In the last 17 years (including January 2024), FIIs were net sellers of Indian shares in 11 of them. In 2022 and 2023, FIIs sold over Rs 40,000 crore in Indian shares. As of Thursday, FIIs had sold over Rs 20,000 crore of Indian shares.January stands out because FIIs usually prune their holdings before the previous year end to close their books, and start afresh in January. During this month, quarterly results start pouring in after the first week. That is one of the triggers for the volatile January month in Indian markets.Also, Q3 is usually a slow revenue and profit growth quarter for Indian IT services companies. One of the few times they broke this norm was during the pandemic years.The volatility in Indian markets during this month is more the norm than anything out of the ordinary. The past trend shows that markets are volatile and move sideways during January and start getting exuberant just before the budget is announced on February 1.So , fasten your seatbelts because it’s going to be a bumpy ride.

Graph of the week