Markets brace for January storm as retail, institutions face off in derivatives

The battle of sentiment between the client category (comprising high net-worth and retail investors), and institutional investors has spilled over to the new year. The former has taken a bearish stance on index futures, and the latter a bullish one, a development likely to make markets choppy after a secular rally last month.

On 29 December, the first day of the January series, the combined cumulative net short Nifty and Bank Nifty futures (index) contracts held by clients and proprietary traders stood at 90,487. These contracts have been purchased by foreign portfolio investors (FPIs) and domestic institutional investors (DIIs), with the FPIs accounting for most buys on a net basis, National Stock Exchange of India (NSE) data shows.

The clients’ and proprietary traders’ short positions have been rolled over from the previous month, while FPIs have rolled over long bets and added fresh ones. DIIs have also rolled over their bullish bets, albeit in smaller numbers than FPIs.

FPIs’ net purchases at 66,135 crore in December stand at a record high for any month, as per National Securities Depository Ltd (NSDL), while exchange data shows DIIs bought net 12,942 crore worth of shares during the month.

The same data for BSE and NSE shows clients sold shares worth 14,633 crore in December.

On an annual basis, too, while FPIs purchased a record 1.71 trillion worth of shares in calendar year 2023 and DIIs bought 1.85 trillion, clients sold 72,921 crore worth of shares in the secondary market.

Even cash market activity on BSE and NSE shows that while institutions have been bullish, clients or retail/high net-worth individuals (HNIs) have booked profits in the calendar year, which has seen the Nifty jump 20% to close at 21,731.4 on 29 December.

Chandan Taparia, senior vice-president, derivatives research, Motilal Oswal Financial Services, feels that in January, volatility could be high due to the ongoing ‘conflict’ between the two classes of investors.

He expects Nifty to trade in the 21,300-22,200 range in January, and the sectoral Bank Nifty index to rule in the 47,500-49,500 range. The latter closed at 48,292 on 29 December.

“Seasonally, January tends to be a weak month for equities, with global fund managers taking some profits off the table,” Taparia added.

Indeed, in the past five years through 2023, January has given negative returns between 0.1% and 2.5%.

Gaurav Dua, senior vice-president and head of capital market strategy at Sharekhan by BNP Paribas, said he would not be surprised if the Nifty “pulled back by around 500 points, given December’s stellar rally”.

He expects the pullback in micro- and small-cap indices to be sharper if one indeed happens next month. However, his bullishness for the whole year is intact.

“In 2024, tactical plays include chasing value over growth in the large-cap space with a focus on capital, capex (capital expenditure) and consumer sectors. Also, IT (information technology), two-wheeler autos and pharma, which were laggards in 2022 and 2023, could look up,” Dua added.

Index and stock futures contracts normally expire on the last Thursday of a month. If Thursday is a holiday, expiry happens a day earlier.

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