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Grim economy makes Nifty 50's historic bounce hollow

 

Cogencis, Wednesday, Mar 25

By Chiranjivi Chakraborty

MUMBAI – The biggest one-day surge since 2009 isn't making many fund managers enthusiastic about the prospects of domestic equities, as steps to stave off the threat of coronavirus may lead the country into an economic abyss.

Today, the Nifty 50 clocked gains of nearly 7%, helped by a bout of short-covering by foreign institutional investors, strong cues from global markets, and speculation that the government is considering a market stabilisation fund worth 500 bln rupees.

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"It's an indication of an intermediate bottom in a bear market, we will see sharp rally from here for a few weeks before bears take control of the market again," said a portfolio manager.

Fund managers termed the near 9% gains in the benchmark indices in the last two sessions a "bear market bounce", which gives the impression that the worst is over, but is actually nothing more than a false bottom before a bigger crash comes knocking.

For instance, in the previous bear market triggered by the global financial crisis in 2008, the Nifty 50 had rallied 18% in Mar-May of that year after a 27% fall in Jan-Feb, only to nosedive 58% in the subsequent five months.

The fragility of the surge in today's session is borne out by the weak delivery volumes in some index heavyweights that led the gains. Of the top five contributors to the Nifty 50's 516.8-point rally today, only one stock--Reliance Industries--saw delivery volumes that exceeded the average of the past three months, that too, helped by two humungous block deals in the stock.

Further, foreign institutional investors continued their selling spree and net sold domestic stocks worth 19 bln rupees, while their domestic counterparts net bought shares worth only 7.4 bln rupees.

"There is no meaning behind this rally...it's a classic bear market pullback," said a city-based portfolio manager.

For most investors, the gains in the market also lack meaning because of the grim background in which they have come. India on Tuesday announced a 21-day lockdown of its entire population in a bid to limit the fast-spreading coronavirus that has so far infected over 600 people in the country.

Most health experts believe the toll from the virus will only rise in the coming days as it starts to spread within the community. Many worry that efforts at isolation may not be enough if the country is unable to ramp up its testing ability in order to isolate the sick and their close contacts from the rest of the population.

Across the globe, the pneumonia-inducing virus has infected over 400,000 people and killed over 10,000, with countries across Europe and some parts of Asia under complete closure as governments scramble to contain the pandemic.

Economists have already warned that the unprecedented closure of businesses and complete standstill in economic activity may have already tipped the global economy into a deep recession.

Earlier today, Deutsche Bank warned that India's complete lockdown could shave 5% off the country's GDP in the June quarter, with high risk of GDP decline in the September quarter, too, if the lockdown is extended.

"This is something that nobody saw coming and the implications of this bear market will be much worse than the 2008 financial crisis...the real economy will definitely take a lot of time to recover even if the market recovers much before it," said Udit Yadav, an independent investor based in New Delhi.

Pankaj Pandey, head of retail research at ICICI Direct, echoed Yadav's view and suggested that investors should brace themselves for more correction "because we do not know the quantum of the damage".

The uncertainty on the extent to which coronavirus will damage the economy is highlighted from the fact that brokerage firm Morgan Stanley has cut its earnings-per-share estimate for BSE Sensex companies for the third time in two months.

For investors, therefore, the large swing in prices amid heightened volatility should be a sign that not doing anything is perhaps the best course of action in the near term, a strategy that policymakers have also adopted.

So far, both the Reserve Bank of India and the government have been stoic and have moved only to ensure that financial markets function properly and that individuals and companies do not face undue regulatory burden in these unprecedented times.

Portfolio managers such as Yadav, therefore, have suggested investors with some dry powder to stick to only large-cap fast-moving consumer goods and information technology companies whose valuations have become cheaper, as they may withstand the storm better than most others.  End

(With additional inputs from Apoorva Choubey)

Edited by Avishek Dutta

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