Covid-19 will weigh heavy on the markets

Indian indices witnessed a bloodbath during the week posting the worst week in over a decade – down a whopping 23%, before making a sharp comeback on Friday. It still ended the week with a loss of 9%.

The Nifty on Friday fell sharply to hit the 10% lower circuit towards 8500 zones as many participants ran to cut their leverage position in the absence of mark to mark margins. The market took a halt for 45 minutes as per the exchange’s circuit limit rule but the intraday sentiment got revived soon as Dow Future recovered along with a sharp recovery in USD/INR.

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Buying from DIIs, bargain hunting from long term portfolio investors, recovery from other global indices, appreciation in USD / INR from its historical levels and short covering in many beaten down oversold stocks lifted the sentiment which helped the Nifty to recover by more than 1,500 points intraday.

This Friday was a historical day for the Indian market as Nifty hit the lower circuit after 12 years and then witnessed one of the biggest intra-day pullbacks of recent times.

Hopes of a US stimulus package to deal with coronavirus pandemic boosted stocks across the globe.

Assurances by regulators SEBI and the RBI also allayed some fears.

India VIX, also called the greed and fear indicator surged up to the 59.48 mark, one of the highest levels in the last 11 years. Higher VIX beyond 50 zones suggests that volatile swings could continue in the market. Volatility has to cool down from current multiple years of high zones, to ensure that only stability is back in the Indian market.

Post hitting the lower circuit on Friday, the Nifty index recovered to knock the psychological 10,000 zones and closed at 10,024, up 4.5% for the day. For the week, Nifty 50 and Sensex fell 9.4%/9.2% respectively to close at 9,955/34,103. Nifty Midcap 100 and Nifty Smallcap 100 were down 10.8%/13.2% respectively. All the sectors ended in red with Media being the biggest loser, down 16% during the week. Others were down 9-14%.

Foreign institutional investors (FIIs) continued to be net sellers, selling equities worth more than Rs 19,614 crore while DIIs were net buyers to the tune of Rs 17,596 crore.

Policymakers globally are still trying to figure the right measures to fix the disruption caused by the coronavirus pandemic. The concerns over the kind of economic damage this outbreak would lead to will most likely weigh on the market for a while. Markets would take a while to recover from this significant price damage. While volatility may continue in the coming days, we could see intermittent relief rallies, however, these are likely to be short-lived.

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Markets may not recover in a hurry and any bounce in the market could be sold into. In such times of global volatility, retail investors should keep calm and not panic. Long term investors with good quality stocks should hold on to their portfolios and see through the current storm. Even in the past, we have seen many major economic issues impacting the market, however, we have recovered from most of them over a period of time. In fact, investors sitting on cash can start accumulating 10-15% of overall allocation on a gradual basis.

Nifty has to continue to hold above 9,400 zones to witness a bounce back move towards 10,300-10,650 zones; while key support exists at 9,400 then 9,100 zones. However, traders are advised to remain light on positions as volatility is at multi-years high across the globe.

(The writer is head of Retail Research, Motilal Oswal Financial Services Limited)