Markets likely to remain volatile

Amidst concerns over the rapidly spreading coronavirus pandemic, rating downgrades on fear of NPA pressure in financial sector due to lockdown and extremely weak auto sales data; major benchmark indices fell for the seventh consecutive week. The Sensex shed 7.46 per cent to close at 27,591; while the Nifty was down 6.66 per cent, ending at 8,084. Relatively outperforming the benchmark indices, the Small-cap and Mid-cap indices were down only 1 per cent and 3 per cent respectively. Market breadth was also in favour of advances for three straight sessions. It is pertinent to observe that while the benchmark indices have fallen nearly 33 per cent in the last seven weeks, the Bank Nifty has fallen by over 44 per cent. The price-to-earnings (P/E) ratio for the Nifty index has declined to 12.3 from 18 at the start of the year and a record 50 per cent of the Nifty stocks are currently trading at a single-digit P/E ratio. Investors are far too complacent about the impact the coronavirus might have on global economic activity. The Indian markets have been expensive and they are not insulated from whatever is happening globally. Many FII fund managers feel the country is under-reporting the number of people infected with the virus. Once more cases come out, the markets will react more violently. India is as vulnerable, if not more, as other markets.

The recent economic data has been very disappointing. The Indian economy can worsen further. That's because the global economy is weakening and India is not decoupled. To avoid a very big crises and collapse of NBFC sector, the moratorium on loan repayment should be extended and NPA recognition norms should be relaxed. Industry is looking for relief in the payment of taxes, statutory dues like PF and ESIC (three months' payment to be deferred without interest and penalty), as well as employment relief (like reimbursement of minimum wages to companies which have paid contract workers) and increase in working capital limits from 10 per cent to 25 per cent. Till date the government has announced a plan to help the poor worth Rs 1.7 lakh crore ($23bn), only about 0.8 per cent of GDP. Even that includes previously budgeted outlays that will merely be spent sooner. Smaller nations like Malaysia has unveiled a relief package with a face value of over 16 per cent of GDP, including loan guarantees, wage subsidies and even free internet during the period of social distancing. Comparison showcases the 'stringency' of our government's response to the pandemic. Much depends on how long the lockdown lasts in our country. It is due to be lifted on April 15, but restrictions may linger in states with high numbers of infections. If 60 per cent of the country remains locked down until the end of April, up to 10 per cent of India's GDP in the second quarter could be lost. The balance of costs and benefits will change as the pandemic unfolds. There is urgent need for the governments to offer support for business in an integrated way.

Equity markets will remain shut on April 6 (Monday) for Mahavir Jayanti and on April 10 (Friday) for Good Friday.

FUTURES & OPTIONS

On the back of heightened volatility in global markets, derivative segment witnessed lower volumes. With two holidays in the week ahead, market players do not expect any significant improvement in volumes. The Options data suggests that the Nifty could trade in the broad range of 7,500-8,500 in coming days. Fresh bouts of selling is not ruled out at higher levels, experts feel. On monthly options front, maximum Call open interest was seen at 9,000 and 10,000 strikes; while maximum Put open interest was at 8,000 and 7,500 strikes. The Implied Volatility (IV) of calls closed at 53.02 per cent while that for put options closed at 59.41 per cent. The Nifty VIX for the week closed at 60.05% and is expected to remain volatile with bullish bias. PCR OI for the week closed at 1.26. Nifty open interest remains low near 10 million shares, which is a decade low suggesting low leverage. Decline in India VIX suggests some consolidation around 8,000 levels.

In the coming week, deposit and bank loan growth data for the fortnight ended March 27 will be released. Sources indicate that more relaxations from RBI are on cards. After sharp cuts in market capitalisation of private banks like RBL, Bandhan and others; some industry biggies are eyeing 'take-over' prospects. Relief rally from current levels is not ruled out. Contrarian accumulation is recommended. Hopes of truce between Saudi Arabia and Russia triggered rally in crude oil prices. A truce between the Russians and Saudis would do little to shift present dynamics and might even cause greater problems, say observers. With many parts of the world under lockdown, global demand has plummeted. Many expect a deep recession worldwide. Outlook for oil marketing companies IOC, BPCL and HPCL looks good in near term. Pharma stocks are back on the radar of fund managers. In an otherwise weak market, pharma counters witnessed good buying. Buy Biocon, Sun Pharma, Glenmark, Cipla and Dr Reddy.The Covid-19 impact on various sectors of the Indian economy would depend on the longevity of the outbreak and the lockdown. Except for essentials in the consumer goods, most sectors would be impacted. In a prolonged near-zero revenue situation and cash flow disruption, aviation will suffer. For tourism sector, the travel bans and lockdowns in place translate to revenue loss of around $10 billion. Coming to retail sector; textile, footwear, fashion accessories, furniture, and other household appliances will have revenue losses. However, food and other FMCG essential services segments will witness a temporary surge in sales driven by panic buying and hoarding.

Given that the gems & jewellery contribute to 12 per cent of India's merchandise exports, the impact of the slowdown in global demand is expected to pull down India's overall exports very steeply. Apart from supply chain disruptions, behavioural changes in consumers will lead to much lower four wheeler sales. Expect prolonged recession in automotive sector. Of the total demand for electronics in India, about 50-60 per cent of the products and 70-80 per cent of the components are imported. High foreign exchange risk not ruled out in electronics goods segment. The Covid impact on the textile sector is expected to be moderate in the coming weeks. However, if the outbreak remains prolonged, then the impact is expected to be high. Stocks looking good are Sun Pharma, ITC, Cipla, Lupin, IGL and JustDial.

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