Citi on Indian Equity Strategy,
The Indian market has so far defied the global macro wobbles: 1) NIFTY +1.6% YTD, while other key indices -7% to -25%, 2) With all the talk about falling government bond yields, which signify delays in rate hikes or even deflation, Indian long-dated yields have been holding up, while short-dated has even risen due to high inflation expectations, 3) Volatility keeps drifting lower, e.g. 1Yr ATM IVOL at cheapest level vs. SPX’s
NIFTY has the lowest 3M ATM IVOL among key global indices, and is trading in singledigit percentile. While CIRA remains positive on India over the medium term, there is only +4% upside to our 2010 year-end target for NIFTY (5,237 vs. 5,450). Investors can get an attractive risk-reward in the short-term by buying 3M NIFTY puts. They can also consider accumulating longer-dated volatility. NIFTY has become the second cheapest long-dated volatility to carry (after KOSPI 200). It is at single-digit %-tile vs. its own history, and trading at historic low vs. SPX’s.
