The number of days the Small & Midcap indices have risen by 1% or more neared previous best years in 2023. Such broad, ‘all boats sailing’ uptrend years are rare. In the past, such years have been followed by more than average drawdowns in the following year, DSP Mutual Fund said in a report.
On average, calendar year drawdowns for largecap, midcap and smallcap are 19%, 23% & 26%, respectively. But the year following a bullish ‘unsettling calm’ year, the average drawdowns for top 5 of such years are 27%, 32% & 37% for largecap, midcap and smallcap indices respectively. This indicates that these calm years are followed by heightened volatility and drawdowns. The report expects markets to become volatile in 2024.
BSE Sensex Index has now gone for almost 8 years without a bear market, the report said. One of the ways to define a bear markets is a decline of more than 20% and a time period of more than one year to regain previous highs.
COVID decline was much deeper but the markets recovered in about 9 months to reclaim all time highs. This made sure that participants avoided the long-drawn periods of pain when stocks don’t deliver returns.
The previous period of such a stable and smooth market was way back in 1980s. Volatility moves in clusters and current cluster of low volatility would likely give way to higher volatility, the report said.
India has received large doses of foreign investments, but the record is patchy. India is ranked 5th in world GDP rankings in 2024. It has delivered steady returns in equity markets, no defaults in sovereign debt and now a relatively stable currency over the last 5 years.
These changes could result in large inflows of foreign investments but are yet to fructify in hard data, the report said. FPI equity and debt flows have been the most volatile.
FPI debt flows are likely to pick up as India becomes the part of global bond indices. An opportunity to benefit from this trend may present itself in FY25 onwards by participating in long duration Govt. Securities in India. India is likely to receive $25 billion in FPI inflows as it become the part of global bond indices, the report said.