Friday, March 27, 2020

Market to offer both sell-on-rally and buy-on-dips opportunities

Uncertain times results in panic and markets have reacted accordingly over the past few weeks. However, it seems panic selling has now come to a halt, at least for the time being. The revival of confidence to some extent can be attributed to the government’s efforts the world over to offer stimulus and avoid major damage to economies. After US’ $2 trillion stimulus, a whopping 9.5 per cent of its GDP, Germany’s 21.1 per cent of its GDP granted as stimulus, China’s 2.8 per cent, India’s stimulus, a whopping 9.5 per cent of its GDP, Germany’s 21.1 per cent of its GDP granted as stimulus, China’s 2.8 per cent, India’s stimulus quantum looked small, but nonetheless it is arriving in piecemeal packets regularly.


While these are temporary steroids for the economy, nobody can estimate the amount of pain that this pandemic and lockdown are going to cause to the economy and businesses. The assurances of various timely measures by the government and regulatory bodies have offered some relief, but the situation at hand will surely have a far-reaching recessionary impact.

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 remains a 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.

The domestic market has corrected over 30 per cent from highs of January 2020 and the recent bounce was expected as the market was deeply sold into the virus fear. We expect the bounce to be approximately 38-50 per cent of the fall in the next 2-3 weeks. If the situation escalates, there will be more gloom and, in that case, the market can certainly make fresh lows.

But for now, the government’s complete lockdown is offering as a ray of hope to the bulls to come back.

On Friday, RBI announced infusion of liquidity worth Rs 3.74 lakh crore, i.e. 3.2 per cent of GDP, by trimming CRR by 1 per cent, reducing interest rate by 75 bps to 4.4 per cent and offered other liquidity-boosting instruments, which would ease fund raising in the short term. Though RBI’s decision to allow a three-month moratorium instead of six on payment of EMIs on loans and working capital requirement has disappointed many.

But, RBI is playing every card in its pocket to prevent a crisis-like situation by giving banks the ability to lend sufficiently. However, no direct helping hand has been offered to aid industries as of now.

Technical Outlook
Nifty50, on the weekly chart, posted a big bullish candle after five continuous losing streaks. However, it closed the week on a mildly negative note after recovering almost 15 per cent from the recent lows of 7,511. In the last trading session, after a strong opening and later a positive surprise from RBI, the benchmark index ended near the previous close, which is a bearish signal when the market does not respond to positive events.

In the short term, support and resistance for Nifty50 are placed at 7,600 and 9,050, levels, respectively. The market is currently oversold and has room for a bounceback. Traders with sizable risk appetite should maintain appropriate stop losses, as India VIX is expected to remain at this level.

Both sell-on-rallies and buy-on-dips opportunities would be available to traders.


Expectations for the Week
In these uncertain times, hope, as concluded by our Finance Minister, is ‘as things develop, we will come back..’ And investors should remember these timeless words by Dr Robert Schuller: “Tough times never last, but tough people do!” In our case, tough businesses do last. 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. A new world order will emerge once Covid-19 goes, many new business opportunities will arise and nothing has to be taken for granted. For example, cigarette consumption may reduce whereas sanitizers may become a daily consumable item. Consumer habits are likely to change, when they come out of this lockdown. Investors should adopt a wait and watch approach and go for selective buying at this level. Be saf e and healthy. Nifty closed the week at 8,660, down 1 per cent.

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