The Small & Midcap indices have experienced a notable trend in 2023, with a significant number of days seeing a rise of 1% or more. This pattern is reminiscent of previous years characterized by broad market uptrends, where most segments perform well. However, history shows that such bullish periods are often followed by above-average drawdowns in the subsequent year.
According to a report by DSP Mutual Fund, in the years following bullish phases marked by 'unsettling calm,' the average drawdowns for largecap, midcap, and smallcap indices tend to be higher than usual. Specifically, the average drawdowns for these indices in the year following such calm years are 27%, 32%, and 37%, respectively. This suggests that periods of market stability are often succeeded by increased volatility and downturns.
The report anticipates that markets will become more volatile in 2024, reflecting this historical trend. The BSE Sensex Index, for instance, has now gone nearly 8 years without experiencing a bear market, defined as a decline of more than 20% lasting more than one year before regaining previous highs. While the COVID-induced decline was significant, markets recovered relatively quickly, avoiding prolonged periods of negative returns.
The current period of low volatility may soon give way to higher volatility, as volatility tends to move in clusters. Despite this, India has seen substantial foreign investments, ranking 5th in world GDP rankings in 2024. The country has offered steady equity market returns, maintained sovereign debt reliability, and stabilized its currency over the past five years.
However, the impact of these changes on foreign investments has yet to be fully realized in hard data. Foreign Portfolio Investor (FPI) equity and debt flows have been volatile, but FPI debt flows are expected to increase as India becomes part of global bond indices. This presents an opportunity for investors to benefit by participating in long-duration Government Securities in India. The report estimates that India could receive $25 billion in FPI inflows as it becomes part of global bond indices, potentially driving further market activity.
(With Agency Inputs)
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