Sensex
A man looks at a screen across the road displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai February 17, 2014.Reuters

Investors may witness another year of high volatility in stock markets in 2016 as a slew of negative factors could lead to further selling by overseas investors.

Factors such as interest rate hike in the US, rupee depreciation and delay in reforms that resulted in aggressive of shares by foreign investors this year are also expected to rattle markets in the coming year.

However, mid- and small-cap stocks will continued to be favoured by domestic investors next year until they realise the rally in the stocks is overdone.

The sell-off, driven mainly by these factors, in domestic stock markets so far in 2015 has made benchmark indices head towards registering their worst yearly performance in four years. Foreign institutional investors (FIIs) have sold shares worth Rs 30,000 crore since June.

Both the BSE Sensex and Nifty indices, which have hit all-time highs earlier this year, are mostly to end 2015 at nearly 5% below the closing levels on the last trading day in the previous year. The Sensex gained nearly 30% in 2014 when investors' optimism on the Narendra Modi government was at its peak.

Analysts expect FII selling to continue in 2016 largely due to concerns over additional monetary tightening in the US that could lead in weakening of rupee against the dollar.

"We expect equity and currency markets to remain volatile in 2016 because of liquidity adjustment post US Federal Reserve rate hike and global economic slowdown," The Economic Times quoted Rashesh Shah, chairman of the Edelweiss Group, as saying.

Signs of slowdown in China and its authorities opting for yuan devaluation are also expected to weigh on investor sentiment. But passing of reforms by the government to boost business environment in the country may mitigate the impact of FII-selling in the markets.

The Modi government was forced to delay the passage the Goods & Services Tax (GST) Bill in the past three sessions of Parliament, as it got struck in Rajya Sabha, where the BJP-led NDA does not have a majority.

"If the GST Bill does not get passed within the first few months of the coming calendar (year), it will be a very bad sign and we would not want to increase our India allocation. But if it is passed, we would probably want to double our weight on India," said Mark Mobius, executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments.

"Stock-specific approach to markets will continue to work in 2016," said Nilesh Shah, managing director at Kotak Mahindra Asset Management Co. "It's not what the asset class is going to do, it's what you do within that asset class in terms of picking stocks that's going to give returns."

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