Market course hinges on lockdown curbs

Ignoring evidence of increasing economic strain due to the coronavirus pandemic, and charged by hopes of a stimulus, renewed FII buying interest and positive global cues on reports that new daily infections from the novel coronavirus may be receding in the United States and Europe, markets posted their biggest week of gains since 2009 during the week ended. The Sensex gained a whopping 3,569 points to close at 31,160; while the Nifty rallied 1,028 points ending at 8,084.

Matching the benchmark indices the small-cap and mid-cap indices were also up 10 per cent and 11 per cent respectively. It is pertinent to observe that benchmark indices are now up almost 20 per cent from their recent lows of 25,981 and 7,610 on March 23. Market breadth was also in favour of advances for three straight sessions. The frenzied rally stood in sharp contrast to dim news on the health of the economy. FIIs were strong buyers for three session in a row buying shares worth Rs 4,200 crore. Reports of a second stimulus package by the government talks between major oil producers to cut output, and optimism of lower spread in Covid-19 cases boosted investor sentiment. Globally, one reason stocks have proved to be more resilient than expected: central bankers have stepped in to provide unprecedented levels of support for the economies of their countries. Economists' forecasts for India output growth this year range from a moderate increase of 1.5 per cent to a flabbergasting 10 per cent drop. Analysts are almost as clueless about the second half of the year as they are about the first quarter. Two related but distinct questions have buffeted financial markets over the past two months: How long will Covid-19 lockdowns last; and how difficult will it be for the economy to recover?

Going by the discussions between the Prime Minister and Chief Ministers of various states, present lockdown may get extended till the end of current month. While so far there has been no confirmation on the same from the Centre, as many as seven states, including Telangana, Punjab, Odisha and Maharashtra, have already declared extension of the lockdown by at least two week.

The future trajectory of markets will depend on whether the 21-day lockdown gets extended, and the nature of restrictions in the coming days. The market will read these details and will react accordingly as the extension will mean further impact on the economy and industries. A strategic phased exit strategy is reportedly on cards to restart the industries in some areas. Many believe the economy will have "a bad recession" in the first half and will rebound in the second half of the year FY21, given authorities' containment measures prove effective in stemming the spread of coronavirus. In the past, stock markets have usually tested their bear-market lows at least once. The defining feature of stock markets is that they are forward looking. The latest rally, however, may have been all about the present - with absolutely nothing to say about the future. Valuations have become reasonable for most sectors, long term investors may accumulate stocks with strong balance sheets, market leadership, and quality management.

Futures & options

Supported by short covering and fresh long positions, derivative segment witnessed heightened activity. The Options data suggests that the Nifty could trade in the broad range of 8,250-9750 in coming days. From the technical front, however both the indices are now currently trading at crucial resistance levels after a steep pullback from lower levels. While put writers were seen actively writing 9000 Put Strike, call writers were seen writing 9500 Call Strike. Interestingly active trading in deep out of the money options in Put Strikes of 8500 & 8000 and Call Strikes of 9500 & 10000 reflect possible wild gyrations in the market. The Implied Volatility (IV) of calls closed at 45.02 per cent while that for put options closed at 49.73 per cent. The Nifty VIX for the week closed at 49.75 per cent and is expected to remain volatile with bullish bias. PCR OI for the week closed at 1.40 which indicates more put writing than calls. Skeptics remained unenthusiastic about last week's sharp spurt. Expect sharp profit booking and fresh bouts of selling in the week ahead, warn punters.

While most global equity markets are entering bull territory, nobody wants to call it that, given the uncertainty around the spread of Covid-19 and the damage caused to the economy. Many believe such sharp rallies are a feature of a bear market. Many believe the markets could eventually head back lower and would retest March lows. However, some old timers say this bear market may have hit the point of capitulation in March and this is likely to be followed by a period of apathy and lower volatility where we reach a point of investor dismay on equity investment. Analysts do not expect major impact of COVID-19 on Q4 results as the lockdown during the quarter was only for a week. Wipro will be the first to announce its quarterly and full year results on April 15, followed by TCS on April 16 and HDFC Bank on April 18.

The IT sector is expected to post a mixed set of Q4 results, with companies having exposure to BFSI and telecom sector (essential services) remaining unaffected, but companies with exposure to the aviation, tourism and hospitality sectors may see a fall in revenue. The recent depreciation of the dollar-rupee will be a positive for the sector. Do not expect any surprises, say industry sources. Use bulges to trim positions in IT stocks. The banking sector should see its earnings largely unaffected by the present situation as the lockdown began towards the end of Q4 and lenders with size and scale are expected to have decent Q4 with good deposit growth. However, in the absence of clarity on whether the three-month moratorium applies to the loans NBFCs have taken, the shadow lenders have to repay banks at a time when their cash flows have taken a hard knock due to the coronavirus pandemic. In a bid to fight the adverse fallout of the coronavirus disease (Covid-19) lockdown, the Reserve Bank of India (RBI) should start buying corporate bonds to provide the much needed liquidity support to corporations. Industry sources expect select buying in large banks and selling in NBFCs in near term. India ranks third worldwide for pharmaceutical production by volume and 13th by value. A major supplier of affordable low-price drugs across the world, India's role as the 'pharmacy of the world' is well acknowledged by experts. Indian pharma industry is set to take advantage of generic drug needs, disruptions across global pharmaceutical supply chains and vulnerabilities caused by Covid-19. Stay overweight in the sector.

(The author is a stock market

expert. He is former vice

chairman of AP Planning Board)