Unabated selling in stock markets beyond forecasts

Fears that the coronavirus pandemic is spreading very fast as country after country is going into a complete lockdown mode have been taking a toll on the stock markets across the globe.

The coronavirus (Covid-19) is a 'Black Swan' event, a metaphor for an extremely rare event that is unforeseen and has an enormous impact. This unexpected and hard-to-predict event was not within the range of normal expectations.

Benchmark indices posted their biggest weekly losses in the percentage term, with the BSE Sensex falling 4,187.52 points (12.27 percent) at 29,915.96, while the Nifty-50 shed 1,209.75 points (12.15 percent) to end at 8,745.45 levels during the week ended.

It is pertinent to observe that FIIs have remained sellers from the past 19 sessions selling equities worth Rs 62,611.82 crore.

Over the weekend, the Centre has announced a production-linked incentive (PLI) scheme with a budgetary allocation of Rs 40,995 crore. Under the scheme, electronics manufacturers will be offered incentives ranging from four per cent to six per cent on their incremental sales of goods manufactured in India for a period of five years.

The bailout measures, coupled with efforts by governments to support businesses and people facing months of disruption, have given investors hope that 'the economic fallout, which is going to be big, will at least be minimized.' Because the underlying problem of the virus is still there all equity rallies are getting fizzled out quickly.

Analysts are now projecting that global economy could shrink at rates far worse than the 2008 global recession, ending weeks of cautious optimism about its ability to withstand the fallout from the coronavirus.

The fallout from the coronavirus pandemic has swelled in recent days, as cities and states across the world have increasingly mandated that residents stay home. Since this hit to revenues is happening throughout the world, the total hole globally will be roughly about $12 trillion.

Governments are responding, of course, but in most cases these responses will just mitigate some of the ripple. Governments' capacities to deal with this hit vary greatly and will be a major driver of markets going forward.

Viral outbreaks occur and then they end. There have been many viral outbreaks historically such as Seasonal Flu, Rotavirus, SARS, and Swine Flu to mention a few. All outbreaks end, and all influence economies.

While analysts are turning increasingly pessimistic about what next quarter could bring, most of them retain positive expectations for the second half of the year.

Near term trend will be dictated by news flow on Covid-19, F&O settlement, stimulus measures by government and global cues. Nobody knows when the world will completely emerge from this pandemic.

While it is true that there is light at the end of every tunnel, it has to be realised that we are currently going through the tunnel and the end is yet to come.

From an investment standpoint, stocks anticipate revival of economic activity by 3 to 6 months. If Covid-19 is contained by the end of September, stocks will begin to reflect or be priced on normalized 2021 earnings power. If this occurs, markets will give some opportunities to park your money to work over the next few months.

Futures & options

Ahead of settlement week, on the back of the extreme volatility in global markets over the past few weeks, the derivative segment continued to witness whipsaw moves. After much delay, Sebi initiated measures to curb the high market volatility triggered by the novel coronavirus outbreak.

Steps like the revision in market-wide position limit for stocks in the derivatives segment and flexing dynamic price bands, to make short-selling of stocks difficult will be effective for a month from March 23.

Market players say that stocks like NCC, Indiabulls Housing Finance, Jindal Steel & Power, Just Dial, Adani Enterprises, Canara Bank, SAIL, PNB, Yes Bank, PVR and Vodafone Idea would probably go into ban period. If global markets remain stable, punters expect short covering in a big way in coming week.

The short rollovers are happening at cost due to next month futures trading at par to near month futures. This may lead to closure of some short positions whenever Nifty declines towards 7,800-8,000 levels.

What is happening? Hedging or Algorithm trader's strategy question punters. The Implied Volatility (IV) of Calls closed at 68.80 per cent, while that for Put options closed at 72.50 per cent. The Nifty VIX for the week closed at 67.10 per cent and is expected to remain volatile with bullish bias.

PCR OI for the week closed at 0.70. Weekend's upside bounce seems was a positive indicator but, the near term trend of Nifty remains weak and further upside could run into resistance around 9,000-9,100 levels.

Skeptics say upside bounce could be only a temporary relief for the market amidst violent decline. With the measures that central banks have taken over the past week improving liquidity, expect modest buying in banking stocks.

Weakness in rupee triggered buying in technology counters. Healthcare stocks are good defensive bets in current scenario say fund managers. Check valuations before buying.

Buy Infosys, HCL Tech, TCS, Mindtree, Axis Bank, HDFC bank, Bandhan Bank, Biocon, Cadila Health, Glenmark, ITC, RIL, SBI and Tata Steel.

(The author is a stock market expert. He is former vice chairman of AP Planning Board)