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Informist, Friday, Nov. 29, 2024

 

By Apoorva Choubey

 

MUMBAI – The December derivatives series is unlikely to spell relief for Indian equities, as the positioning bias in futures and options remains bearish in the backdrop of geopolitical tensions, slowing corporate growth, uncertain global trade relations, and a rising dollar. Foreign institutional investors have stepped into the series with trepidation, adding bearish positions to index futures, while traders are not in a hurry to change their limited return strategy of writing options, especially calls, according to analysts.

 

After crashing close to 8% in the October derivatives series, the Nifty 50 saw a turbulent November series, with the sell-off by foreign investors pulling the index to its lowest level in more than three months. However, a recovery in the last few sessions helped the index claw back some losses and end the series with a 1.2?ll.

 

The reasons for the sell-off seen in the November series are as predictable as they are compelling, Nuvama Institutional Equities said in a report, alluding to frothy stock valuations, relentless foreign outflows, and an underwhelming earnings season. "It was a toxic cocktail that left the markets gasping for breath on most days," the brokerage said.

 

The December series hasn't started on an optimistic note either, though the month has been strong for Indian shares in 12 of the past 18 years. While foreign investors have bought some Indian stocks in the cash market this week, possibly due to MSCI index rejig-related passive demand, they remain bearish in the futures market, analysts said.

 

The net short positions of foreign investors in index futures stood at 119,000 contracts, worth $1.18 billion, after the expiry of the November series Thursday, Nuvama said. At the time of the previous expiry last month, FIIs were net short by 153,000 contracts. 

 

"In the latest series, the FII index positions reflect a long-short ratio of 32.79%, signalling a cautious stance with a higher inclination towards short positions," SBICAP Securities said in a report. Meanwhile, in stock futures, only 72 stocks, comprising 39% of such contracts, concluded on a positive note in the November series, while 111 stocks, representing 61%, closed negatively, which reflects the bearish sentiment, the brokerage said.

 

As the outlook for December is uncertain, high networth and retail investors have reduced their long bets in index futures, market participants said. "HNIs (high networth individual clients) have remained cautious, as reflected both in the data and in our discussions with wealth (management) clients," according to Nuvama. However, they have added more bullish positions in stock futures, as have foreign investors, it said. 

 

The market is expected to remain range-bound over the next three months, analysts at Goldman Sachs said recently, pegging their three-month target for the Nifty 50 at 24000 points. On Friday, the index closed at 24131.10 points, up nearly 1% or 216.95 points. 

 

On Thursday, rollovers to the Nifty 50's December futures stood at 79.3% of the total, higher than the three-month average of 76.4%, according to Axis Securities. The Nifty 50 has started the December series with open interest of 12.9 million, worth INR 308 billion, compared to an open interest of 11.6 million, worth INR 281 billion, after the last expiry. The positioning in the index's futures is leaning towards bearishness, analysts said.

 

On the options front too, the data for the Nifty 50 reveals a bearish tone, with notable call-writing activity seen throughout, said SAMCO Securities in a note after the expiry. The surge in call writing from 24000 to 24500 strike prices highlights the growing seller strength, while reduced put writing signals stronger bearish sentiment, as per the brokerage.

 

Call writing has been the theme in the equity options market over the past few weeks, as the outlook for emerging markets is uncertain. The rise in the dollar and US Treasury yields have added to the pessimism for risky assets, fuelled by concern that US President-elect Donald Trump's trade tariffs could drive inflation higher, at a time when the US Federal Reserve has said it is in no hurry to cut interest rates.

 

Indian equities are at a tricky crossroads, according to analysts, with some noting that the overall participation in index options remains relatively low, which indicates caution among investors and traders. "The current data doesn't inspire an overly strong directional view," Nuvama said. The brokerage expects the index to oscillate within a broad range of 23450-25000 points, a wide band that reflects the heightened volatility in play.

 

During December, further updates from Trump and his new administration on tariff plans and other policy changes could add to the volatility in the market. "The problem with these policy-related announcements coming in is that their impact on global growth and inflation cannot be known right away, and they will be assessed for weeks thereafter, bringing uncertainty," said the chief investment officer at a wealth management firm.

 

The upcoming bi-monthly monetary policy review of the Reserve Bank of India, economic data expected to be detailed across major economies, and movement of commodities will also provide cues to equity markets. Any fresh updates on the indictment of Adani group Chairperson Gautam Adani and his associates will also be monitored. Earlier this month, news emerged that Adani and several others were being indicted by a district court in the US over an alleged multi-billion-dollar fraud scheme involving his solar projects in India.

 

A higher number of stocks will be available for derivatives play this month, with both exchanges introducing new contracts for more than 40 counters each. This is also seen adding to the volatility in the market, said analysts.

 

Among sectors, banks, information technology, power, and telecom are likely seeing bullish positioning, while automobiles, fast-moving consumer goods, and pharmaceuticals are witnessing higher addition of short bets.  End

 

US$1 = INR 84.48

 

Edited by Rajeev Pai

 

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