Should you bet on predictions?

While the pundits make their forecast in December, traders tell us how they play the volatility



December, the last month of the calendar year, is when market experts will start making their predictions on how the Sensex or the Nifty 50 will perform in the next year. It has become a yearly ritual wherein the predictions are made, irrespective of how they fared in the previous year.

For instance, in 2014, the domestic markets gained 30 per cent and the experts were optimistic in the year 2015 as well. Global brokerage companies expected markets to jump 15 to 20 per cent in 2015. Though the Sensex rose 9 per cent initially in 2015 to record its all-time high, both the benchmark indices, the Sensex and the Nifty 50, fell thereafter to end the year down by 5 per cent in 2015. This was against substantial gains of 30 per cent in 2014. However, the BSE Mid-cap and Small-cap had surged about 6 per cent in 2015, providing some gains for investors.

2016 outlook

This year too, many brokerages gave elevated targets in the beginning of the year; others revised the targets mid-year. The Sensex plunged in the months of January and February to record the year’s low at 22,494. Things improved post Budget and the Sensex recovered its initial loss. Factors such as better-than-normal monsoon, low inflation and interest rate cut boosted market sentiment during the second quarter of 2016. The prospects for the market were bright until September.

But the Sensex stayed volatile through the year, causing multiple revisions in the brokerage targets. Citi was bullish on Sensex at the start of 2016 with December 2016 target of 32,000. Global brokerage firms HSBC and Morgan Stanley upped their Sensex target for 2016-end, mid-year, to 28,500 and 30,000 correspondingly from 26,000. In November, HSBC kept the Sensex target unchanged for December-end 2016 at 29,000 and for December-end 2017 at 32,400. On the other hand, Deutsche Bank trimmed the Sensex target to 25,000 from 27,000 on weak global cues.

The Sensex has climbed 11.3 per cent year-to-date. It has zoomed 29 per cent from its February low of 22,494 to September peak of 29,077. Subsequently, the index reversed direction triggered by a medley of factors.

The global turmoil began as the US Federal Reserve hinted at a rate hike. FPI outflows started to impact domestic market. As valuations turned pricey, it triggered profit taking in some of the key sectors such as banking and financials. Clearly, the markets were more volatile in 2016.

Vishnu S, a swing trader, who trades in stocks and futures on a short-term basis, says, “volatility is often construed as a trader’s friend. I trade the Futures & Options segments to leverage the prevalent volatility. There are several option strategies like long strangle that one could deploy to play volatile markets.”

Demonetisation

On November 9, the Sensex nose-dived 1,689 points or 6 per cent on the Centre’s demonetisation move and the surprise outcome of the US election. FPIs had sold nearly $3 billion worth of domestic stocks in the month of November. Subsequently, brokerages trimmed their Sensex and Nifty targets for the year.

Chennai-based swing trader-cum-investor R Ramkumar, says, “demonetisation has not affected the markets since stock markets operate under cashless transaction. I do not believe or focus much on the year-end targets as the targets are always endless. Also, I am a regular investor.”

The Sensex remained volatile and extended its downtrend in November on the back of imminent hike in interest rates in the US and domestic economic slowdown due to demonetisation. Naturally, the Sensex targets get altered with uncertain events.

“After demonetisation, I had to re-balance my equity portfolio,” says swing trader Vishnu. Apart from this, there hasn’t been any big effect as such, he says.

Likewise, there could be uncertain events in 2017 and in the coming years as well.

Amidst volatility, the index is almost back to the December 31, 2015, closing level of 26,117, just 2.5 per cent higher than this level. So how can one overcome this volatility and stay on top?

Lucky strike

Deepak Yadav, designer by profession and trader by passion who has been trading from the time he was a college student, says, “to be on top of the game (trading), one must read and educate himself continuously. Luckily there is plenty of high-quality educational content available for free, like Zerodha Varsity. Make use of these to evolve in the markets.”

Yadav took full advantage of the market fall and executed a profitable trade by buying Nifty 8200-call option at ₹94 when the markets opened in the backdrop of the demonetisation/Trump news. “It was one of the greatest trades this year. I managed to sell it at ₹419 two days later.”

Predictions for 2017

Acoording to Morgan Stanley report, “The equity markets are once again looking attractive and appear poised for double-digit returns in 2017.”

The report said double-digit returns are possible next year, with a base case (50 per cent probability) BSE Sensex target of 30,000. In the bull case, which has a 30 per cent probability, the brokerage has a BSE Sensex target of 39,000 and bear case (20 per cent probability) BSE Sensex target of 24,000.

GST implementation and the long-term benefits of demonetisation, could be positive for economic expansion.

Nevertheless, global challenges like US interest rate hikes in 2017 and surprise policy changes by President-elect Trump could keep the index under pressure. Gold, crude oil and currency movement could also have an impact on the Sensex target in the coming year.

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