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Web of Finance
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| Mar 30, 2004 4:31 pm |
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Indian Equity Markets |
Haresh Soneji
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Look at Beta
Players in the equity market are throwing words of caution, after looking at the rising volatility in the market. Volatility seems to have become a very common feature in the equity markets. And if you are a close tracker of the market, you might have seen how markets move with a bang towards the close of the session, on any given day, of late. While long-term investor might just shrug this off as a normal happening there are several others who would like to understand what exactly is going on. A proper understanding would also enable one to understand the situation better rather than just be afraid of volatility.
Before going on to what volatility is one has to remember that a measure which one can refer to is that of beta. But, since the subject of volatility has been thrown open, lets understand it very briefly. Volatility is calculated by dividing the difference between the index’s or stocks high and low points by its closing value on that day, and multiplying it by 100, to express the result in percentage terms. For example, if the difference between the intra-day high and intra-day low value of the sensex was 400 and the sensex settled at 5800 levels for the day, volatility for the given day would be 6.9% ((400/5800)*100)).
When the Indian markets were on a one-way ride, daily volatility in the Indian markets was around 1-2%. This was a healthy sign for the Indian markets since most of the time, markets opened with a significant gap in the positive and remained there or move upwards. There were very few occasions when market actually moved in the red or closed negative. So, volatility at that point in time was marginal and good for the all the players, including small and long-term investors.
But, of late (the last 4-5 weeks) things have changed. Daily volatility in the Indian markets has perked up to around 6%. This kind of volatility brings us back to the old days, where daily volatility was in the range of 5-9%. Now this could be a tough ask for a day trader and chances are that the day trader may catch the market on the wrong side leading to heavy losses.
Now let us understand what is beta of a stock. Also known as beta coefficient, beta is a measure of volatility, or systematic risk of a company’s stock as compared to the market as a whole. In a simple sense beta shows how a particular stock moves in relation to the market. Beta is dependant upon the time period used to calculate it and therefore it makes more sense to use long-term returns to calculate it. Usually, beta is calculated using several years returns. The reason is simple, an assumption that five years generally covers different sets of market conditions.
Beta is calculated using regression analysis. Investors need not get into the intricacies about the calculation of the beta but should be more concerned with its interpretations. To start with the beta of a stock will be between 1- and 1.
A beta of 1 indicates point-to-point movement with the broad market. A beta of less than one indicates that the stock is less volatile than the market and a beta of more than one indicates that the stock is more volatile than the market. So, basically beta of a stock measures the tendency of the stock to respond to the swings in the market. For example, Zee’s beta is 1.6 to BSE 100, so theoretically, the stock price of Zee is 60% more volatile than the market.
A negative beta means that the stock moves in an opposite direction when compared with the general markets. One has to remember that while this might not be true on all days on an average such a situation will be witnessed.
We calculated beta with data as far as 1998 of the BSE 100 stocks and compared it with the index to get a broader picture. About 63 stocks had a beta of less than 1, indicating that they moved in lesser proportion to the market and were less volatile. So, why do we consider them? Investors who are slightly risk averse would like to hold stocks with low beta as they might not be able to stomach so much volatility in their holdings.
This brings us back to the point as to what contributes to volatility? There are multiple reasons for the same – the expected rise of interest rates in the US may see money being pulled out of Indian markets, the recent bird flu in Asia causing panic in FII community and restricting inflow of funds into India, expiry of contracts in the derivative markets in India, the upcoming assembly elections, huge P-notes outstanding positions in India, existing of quick money by way of hedge funds and other such reasons. Most of the reasons, if you see are external in nature and cornering around FIIs and some of them are recurring. FIIs have become an integral part of Indian capital markets and the market reacts accordingly.
The investor on their part need to look at the betas carefully and these are usually made available by brokerage houses and other research outfits. Some financial publications also give details of beta but the key to the whole process is understanding them properly.
Regards,
Haresh
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