Hyper volatile market movement in both directions to continue
The undecisive phase of the markets doesn't seem to be over yet. This was evident as Indian markets ended in red for the third consecutive week for the first time since May 22, 2020. Nifty and Sensex ended lower by 1.9 per cent each to close the week at 14,341 and 47,878, respectively.
The following week will be no different as the factors leading to the bear streak persists. The Indian Volatility Index (VIX) surged over 11 per cent on the back of a surge in Covid-19 cases.
Next week will be a full trading week, unlike the previous two, truncated by a day. Scheduled expiry of futures and options (F&O) contracts next week is also expected to lend volatility to the markets.
Unabated rise in Covid-19 cases may diminish swift economic recovery prospects. The choppiness in the markets indicate rising nervousness amongst investors and traders alike.
Global markets such as the US observed profit booking in anticipation of increased corporate and capital gains taxes. India faced similar pressure on equities as investors (FPIs) started looking towards safer havens to deploy their money. The rising scepticism led to a net FPI outflow of around Rs 6,200 crore in April, after over six months of robust buying.
"The forward-looking equity markets have already factored in most of the predictable risks," said Nirali Shah, Head of Equity Research, Samco Securities. "Majority of stocks continue to trade at frothier valuations. Therefore, a correction irrespective of the reasons was bound to come. This time it can be attributed to the second wave".
Restrictions on movement announced by various governments instead of a complete lockdown haven't impacted the manufacturing sector like last year. It is not expected to adversely affect the working of the corporate sector either. Despite a slowing vaccination program, stock prices have moved sideways, and there is hardly any panic seen in the market. The pace of vaccination will be crucial for the quicker normalisation of economic activities. It will propel the markets in the right direction.
Corporates have started announcing results for the March quarter, and there are no major disappointments so far. Market participants expect a sharp increase in net profit due to the Covid-led disruption in the base quarter.
Hemant Kanawala, Head – Equity, Kotak Mahindra Life Insurance Co, said, "It will be important to observe comments of banking and domestic consumer-oriented companies on the impact of a recent surge in Covid infection on their business".
With the progress of the earnings season, some big names like Axis Bank, Maruti, Bajaj Auto, Hindustan Unilever and Indus Ind Bank are scheduled to announce their numbers along with several others during next week.
Nifty is trading at 21 times 1 year forward EPS, which is close to an all-time high. Hence upside from valuation rerating is limited. "One needs to watch if there are any earnings downgrade due to emerging Covid situation", said Kanawala.
Rising cases of Covid-19 have once again brought focus on mid-cap pharma companies that have moved up sharply by 12-35 per cent. As India has become the epicentre of the virus resurgence, there is fear of potential earnings downgrades, which could be higher in the case of mid and small caps vis-à-vis the large caps.
Fresh lockdowns and restrictions being imposed by various state governments will impact demand and also business activity. The persistent rise in hard commodity prices is a threat that could weigh many manufacturing companies' margins.
Too many potential negatives could impact markets very soon. Given the near-term challenges and sentiment, we can expect FPI flows to remain subdued in the near term.
Asian stock markets exhibited mixed reactions on Friday. It was after indices at the Wall Street fell following a report that President Joe Biden will propose raising taxes on wealthy investors. Europe's vaccination rollout has been heavily delayed, and the bloc is struggling with a third wave of the virus.
The IHS Markit eurozone purchasing managers index (PMI) rose to a nine-month high of 53.7. The flash eurozone manufacturing output PMI was at a record high and the services PMI at an eight-month high. Europe's delayed vaccination program may hit the services PMI in the coming months as some European countries face the third wave of coronavirus.
The second and third wave of coronavirus will definitely have its impact on the global economy. According to experts, it will adversely impact the first two quarters (H1) of 2021-22.
"The probability of the resurgence of the pandemic impacting growth and therefore, earning, is quite high for the first two quarters of this year," said Joseph Thomas, Head of Research, Emkay Wealth Management said. "These factors would continue to dominate the market in the coming weeks too."
Nifty is trading outside its major rising channel, so bulls need to protect the current support as any break below the same can trigger a bearish sentiment throughout the market. Many major stocks show signs of trend continuation on the upside. The BankNifty index is also forming a minor bottom around its short-term averages on a weekly timeframe.
However, on a cautious note, Shah said, "other leading global indices which were outperforming India are now showing signs of a pullback. We suggest traders maintain a mild bullish to sideways bias on the market and keep tight stop loss just below the market support".
Rusmik Oza, Executive VP, Head of Fundamental Research, Kotak Securities, said, "On the downside, Nifty has major supports at 13,600 and 13,000, which is likely to be the 200 DMA soon."
The short-term texture of the Nifty and Sensex are still bearish and likely to continue. The level of 14,250 in Nifty and 47,450 in Sensex would be the immediate support level for the bulls. Below this, we can expect one more leg of correction up to 14,150 for Nifty and 47,1150 for Sensex. A further downside may also be possible. It could drag indices to 14,000-13,900 for Nifty and 46,500-46,000 for the Sensex.
Shrikant Chouhan, Executive VP, Equity Technical Research, Kotak Securities said, "On the flip side, 14,500 (Nifty) and 48,300 (Sensex) would be the immediate hurdle. Ahead of monthly F&O expiry, sectors which would be in focus are banking, metals and pharma."