Uncertainty likely to haunt stock markets

On the back of measures announced by the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and the central government to provide relief for the economy amid lockdown in the country, markets ended with marginal losses during the week ended.

Benchmark indices, the Sensex shed 100.37 points (0.33 per cent) at 29,815.59, while the Nifty50 was down 85.2 points (0.97 per cent) to end at 8,660.25 levels. The smallcap and midcap indices were down 6 per cent and 5.4 per cent respectively. The stock market has taken a dive over the past month, and the plunge in midcaps and smallcaps has been particularly deep. The market rout has been broad and spanned across sectors. In the fast and violent stock market rout, midcap and smallcaps 'eviscerated'.

As the coronavirus pandemic has spread around the world and reshaped life across the globe, expectations of a painful economic slowdown have prompted a brutal selloff of risky assets. Domestic institutional investors (DIIs) bought equities worth of Rs 4,307.67 crore, while foreign institutional investors (FIIs) sold equities worth Rs 7,165 crore. It is pertinent to observe that FIIs returned to the market as they bought equities on March 27 after remained net sellers for last 23 sessions. DIIs which have been supporting the market sold the equities for the first time on March 26 after remaining buyers in the previous 22 sessions.

The RBI announced a series of steps, including a cut in rates as well as the reserve ratio, which puts its total monetary stimulus into the economy at around Rs 2.7 lakh crore (this figure includes other steps it has announced recently). This with the government's Rs 1.7 lakh crore fiscal package, makes up the size of the total revival package at Rs 5.4 lakh crore or 3.2 per cent of India's Rs 170 lakh crore GDP.

Experts feel that the government could announce major economic relief package for industries in the coming days as the pandemic is expected to hit their earnings in the coming quarters, which would damage the economy too. A package from the government has to address three broad areas (1) protecting livelihoods, (2) protecting businesses, and (3) strengthening the healthcare infrastructure for COVID-19. To this end, the government needs to provide for viability of businesses and employees which will be at the highest risk from social distancing and lockdown such as hotel, restaurants, transport and entertainment. It becomes imperative to compare how India's stimulus package compares to other countries.

Massive $2 trillion stimulus of US translates into a size of about 10 per cent of its GDP. Britain has reportedly rolled out a GBP 330 billion package, about 14 percent of its GDP. Germany rolled out a stimulus package worth over Euro 750 billion or $810 billion equal to more than 20 per cent of Germany's $3.86 trillion economy. The rapid plunge out of and then rise back into a bull market on approval of a $2 trillion stimulus package demonstrates how volatile US stocks have become as the coronavirus pandemic ripples through the economy.

Futures & options

Mirroring the action in cash markets, derivative segment witnessed sharp moves during the settlement week. After a weak start at the start of week ended, near v-type recovery was seen during the later part. The Nifty started the April series with just one crore shares, which is the lowest open interest at inception in more than a decade. High volatility and being the beginning of a new series, option data is scattered at various strikes. The highest call open interest acts as resistance and highest put open interest acts as support. Price rise with rise in open interest suggests long buildup.

Price fall with rise in open interest suggests short buildup. Price fall with fall in open interest suggests long unwinding. Price rise with fall in open interest suggests short covering. The Implied Volatility (IV) of calls closed at 63.13 per cent while that for put options closed at 70.45 per cent. The Nifty VIX for the week closed at 71.53 per cent and is expected to remain volatile with bullish bias. PCR OI for the week closed at 0.58 indicating more call writing than put.

A strong rally supported by volumes above 9,000 and 9,280 can take the Nifty higher to the short-term trend-deciding level in the 9,500-9,600 band. Failure to move beyond 9,000 can see Nifty decline and test supports at 8,260 and then 8,000 in the short term .A further decline below 8,000 can drag the index back to 7,500 once again.

The Bank Nifty recorded an intra-week low at 16,116 before staging a smart recovery to 19,969. Strong rally above this level can take the index higher to 21,000 and 22,000 levels. Inability to move beyond the current resistance level of 20,000 can pull the Bank Nifty down to 19,000 and then to 18,000 in the short term. Bajaj Auto, Hero MotoCorp, Tata Motors, Maruti Suzuki, M&M, TVS Motor, Eicher Motors, etc. will declare their March sales on April 1.

The Supreme Court on March 27 allowed the sale of BS-IV compliant vehicles for 10 days after the lifting of lockdown, barring in Delhi-NCR. Automobile sector is expected to feel the heat for a longer period now on account of lockdown. Use rallies to lighten positions. Investors had been waiting for an economic stimulus package to support the economy during the outbreak. Rally in financials was attributed to the stimulus. Unrealistic swings in InduSind, Axis, Bandhan and others are attributed more to distribution than buying of stocks. Extreme caution is warranted in finance stocks.

The rally during the later part of the week ended was driven by expectations of stimulus measures to support the respective economies and not because of any change in ground realities. A much more stable rally can happen only after any news regarding the virus containment comes in, say observers. During times of uncertainty, have a prudent approach in stock picking. A well-calculated move will maximize the chances of gains and minimize the risk if one has a long-term approach. Accumulate Bharti Airtel, RIL, ITC, HDFC Life, Titan and Cipla.

Heard on the street

How could a microscopic organism destroy nearly $15 trillion in global stock-market wealth in five weeks?

Old timers believed panics are the indispensable hygiene of markets, sweeping the investing landscape clean after every orgy of prosperity. It isn't investments that make or lose money; it is investors, with our own excesses of greed and fear. And that means market panics aren't a time for reaction; they are a time for introspection. Investors should never stop trying to manage their risks. In the run up to the latest panic, many investors seemed to believe large mutual funds, index funds and exchange-traded funds, which can offer broad diversification at extremely low cost, had somehow eliminated the risk of owning stocks. Current panic showcases that risk cannot be eliminated.

In recent decades, psychologists have shown that people tend to overweight recent experience in their predictions of the financial future. Because markets rise more often than they fall, the experience of most investors tends to be positive over time. The longer the good times roll, the more remote the chance of a decline will seem, the more overconfident investors will feel and the more risk they will take. The modern history of financial markets is a chronicle of attempts to control risk- if not eliminate it. One after another, they have all failed.

Economists might be underestimating how long the downturn will last. In the space of a few weeks, they have gone from saying that the world would skirt recession to forecasting the deepest economic contraction in most of the present generation's living memory. But most optimists also believe that the economy will bounce back substantially by September, putting it on the road to recovery.

Such forecasts are predicated on an expectation that the spread of the novel coronavirus will have been contained, that measures to stop its spread will have been substantially relaxed and that people will be substantially relaxed as well, ready to go back to sitting in restaurants and going to shopping malls and taking flights. That is no sure thing. Maybe investors a century ago and more had a wiser view. They believed the world was governed by unseen, omnipresent powers that could be appeased but never controlled—and that financial panics were a form of divine retribution for the sinful excesses of prosperity.

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