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‘Market Bounce Is A Relief Rally; Investors Need To Be Conservative’

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‘Market Bounce Is A Relief Rally; Investors Need To Be Conservative’
Yagnesh Kansara - 30 March 2020

Though the benchmark indices S&P Sensex and Nifty-50 gained 3,834.35 points and 1,050 points respectively during the trading week ended on Friday March 27, they posted sixth consecutive weekly losses. This indicates that stock markets may respond positively to policy measures temporarily but the undertone is still to become firm. The US markets ended lower with Dow Jones (DJIA) down 915.39 points (-4.06 per cent) and the broader S&P-500 Index down 88.60 points (-3.37 per cent) in Friday’s closing.

On a weekly basis, this was the 6th straight week of declines for the markets as several countries have locked down, raising fears of a deep recession. Indian benchmarks are still trading 28.50 per cent lower to the level it achieved on February 14, 2020. From ValentineDay (Feb 14) to Quaratine (March 27), the Sensex is down by 11,786.57 points while Nifty is trading 3,453.20 points lower.

Gold closed out a week of gains in expectation of more stimulus packages while crude oil was trading down for the week, stoked by concerns on the demand outlook.

Uncertain times call for panic and markets have reacted accordingly since the past few weeks. However, it seems that panic selling has now come to a halt, atleastfor the time being. That is the reason why markets have witnessed some gains in the form of relief rally. The revival in confidence to some extent can be attributed to the Government’s efforts world over.

While these are temporary steroids for the economy, no one can estimate the intensity of the pain that this pandemic and lockdown is going to befall upon our economy and businesses. The assurance of various timely measures by the Government and Regulatory bodies, have been a relief but the situation at hand will surely have a far-reaching recessionary impact.

Add to that the rising number of jobless claim in the USA as a result of COVID-19 impact. This has come in at a record high number. This keeps strengthening the claim of a global recession, however temporary it may be.

Earnings contraction in the next two quarters is certainly a given with tourism, airlines, hotels, metals, retail outlets (not under essential goods) getting impacted the most, but by when will they recover is the million-dollar question.

Lower Brent prices is a God sent relief in the midst of all this mayhem. However, investors must not mistake this bounce as a sharp rally, but a normal correction which will face selling pressure at higher levels. Markets have corrected over 30 per cent from highs of January 2020 and the recent bounce was expected given that markets were deeply sold into virus fear.

“However, Don’t mistake a bounce for a rally”, said .Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote.

He said, “We expect the bounce back to be approximately 38 per cent to 50 per cent of the fall in the next 2-3 weeks. If the situation escalates further, there will be more gloom and, in that case, markets can certainly make fresh lows. But for now, Government’s complete lock down is acting as a ray of hope for the bulls to come back”.

Vinod Nair, Head of Research at Geojit Financial Services, said, “After starting out the week with a 13 per cent crash in the benchmark indices, markets recovered during the course of the week following coordinated responses from Central banks and Governments to support the economy”.

Market is currently oversold and has room for bounce back. Traders with sizable risk appetite should maintain appropriate stop losses as India VIX is expected to remain at this level. Selling on rallies and buying on dips, both opportunities would be available to traders.

Expectations for the Week

India Inc’s earnings are expected to contract in the next few quarters given the sudden halt but the search for warriors who can emerge stronger should be the end goal. Investors should primarily look for debt free companies with resilient business operations. New world order will emerge once COVID-19 is left behind, many new business opportunities will arise and nothing has to be taken for granted. For example, cigarette consumption may reduce whereas sanitisers may become a daily consumable item. Consumer habits are likely to change when they come out after a lockdown. Wait and watch with selective buying should be adopted by investors at this level.

For the course of action next week, Nair said, “The stimulus package announced by the government and RBI will have limited effect, until the actual impact of the contagion is known, both economically and with the number of infections. In spite of the relief rally seen this week, investors will need to be conservative in their investments and still focus only on accumulating quality stocks and not go all in”.

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