With Lok Sabha election results expected on June 4, anxiety among markets investors is rising, fuelled by low voter turnout. Is the restlessness around election outcomes much ado about nothing for markets?
Elections are underway in seven phases throughout the country and the final results are expected on June 4, which will set the tone for the markets. Image: Saqib Majeed/SOPA Images/LightRocket via Getty Images
What could possibly go wrong in a bullish environment driven by a strong belief that the economy is on track to hit $5 trillion in three years? There is also the expectation that the current government will regain power for a third term so that reforms, policies and business continuity plans remain intact. Well, nervousness and jitteriness around elections have chipped away at confidence, leading to uncertainties among investors. Result: Markets have turned volatile.
The Nifty has lost over 2 percent in May, but has been gradually recovering. What is eye popping is the India Volatility Index (VIX), which has heated up dangerously. The India VIX has risen 116 percent in the last 13 trading sessions, indicating investors are getting increasingly nervous about a sharp correction in markets in at least the next 30 days. The India VIX, often referred to as a fear gauge or fear index, has an inverse correlation with rising markets. The current rise in the fear index indicate investors are losing confidence in the rally and factors driving the surge in equities.
“This is quite typical of markets in the pre-election timeframe,” says Vikaas M Sachdeva, managing director, Sundaram Alternates. He explains that a lot of noise gets generated by multiple opinion makers, which tends to make investors circumspect.
The India VIX has increased 42 percent since the beginning of January, and has spiked 60 percent in May alone. This is not encouraging at all. The VIX is most closely watched by traders as a measure of the expected volatility of stock markets over the ensuing 30-day period and is the primary tool for traders to protect themselves against, or bet on, sharp moves in stocks. Investors, research analysts and portfolio managers assess VIX values to measure markets risks, fear and stress before they make investment decisions.