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Volatility risks high in Indian stocks

The Indian stock market holds higher volatility risks for investors compared to global markets, says analysts.

india Updated: Aug 09, 2006 19:12 IST

Indian stock market presents higher volatility risks for the investors in comparison to global markets, but the risk remains lower than that of other emerging markets, a report said.

According to a latest report from global equity research major Morgan Stanley, the 'Beta' for Indian equities is high relative to that of global equity markets but low when compared to the emerging markets.

Beta value measures the volatility risk of a stock and the higher the Beta, the more the stock's volatility and related risks. Beta measures the sensitivity of a stock movement relative to the movement in the benchmark index such as Bombay Stock Exchange's Sensex.

Morgan Stanley's India-based economists Ridham Desai and Kuleen Tanna said in a report that India has witnessed the sharpest rise in Beta among the larger emerging markets over the past three years.

A Beta value of one means that for every change of 1 per cent in the benchmark index, the scrip moves by 1 per cent. Similarly, If a particular stock has a beta ratio of 1.5 in relation to the Sensex, the stock is expected to rise or fall by 15 per cent for every rise or fall of 10 per cent in the Sensex.

Among the emerging markets, India's beta tends to be low during bull markets and high during bear markets, Morgan Stanley said.

Most of the increase in beta in the domestic market has come from the rising correlation of returns with world returns and the correlation is now at its highest level ever, Desai and Tanna said.

However, India's positive democratic factors, such as a vibrant corporate sector, viable capital markets and a strong long-term growth story, are expected to lead to the relative volatility of Indian equities to rise, while the correlation of returns with the rest of the world would fall over the longer term, coupled with a drop in Beta.

As the global investors are putting money into India because of the country's idiosyncratic factors, the increase in the correlation of returns and the fall in relative volatility are rather unexpected, they added.

According to the research report, the combination of a higher correlation of returns with the world and a Beta at around the Emerging Market median makes Indian equities a less efficient "Beta play" for aggressive investors.

First Published: Aug 09, 2006 19:12 IST