Market’s concern about the imposition of a second nationwide lockdown faded last week as announced restrictions in most states were not as stringent as expected. However, volatility has come back as the Centre and state governments are considering additional restrictions due to the increasing infection rate and to curb the spread of COVID-19 across the country.
During the week, Nifty50 dragged to a new monthly low and the trend of the market got narrower with a negative bias in the last 2 months. New daily COVID-19 cases have crossed 2.34 lakh — more than double of what they were during the peak of the first wave. These numbers may continue to rise in the coming weeks and may reduce over a period of time as restrictions were imposed only recently. We can expect this phase of stringent lockdowns to prevail for a period of two-three months, taking cues from similar cycles in developed countries like the United Kingdom and the United States. The economic growth will be impacted for a quarter, and it could be higher than anticipated initially, as norms have become more stringent.
As far as the implication on the market, the period of impact may be lower at around one to two months, in anticipation of the new normal. The market has been factoring this slowdown over the last two months, slowly consolidating. Implications to banking and discretionary sector is presumed to be the highest. The market is drifting toward defensives like IT, Pharma and FMCG as a precaution.
During the week, the market did attempt to pullback from selling but it lacked enough conviction. The market had some relief and support from defensive sectors which too could not sustain due to profit booking in IT sector. It was triggered as initial Q4 results were largely in-line with expectations, not providing leeway to advance further for a highly valued sector. We believe this impact will be only in the near-term, as medium to long-term trend is still positive.
In the meantime, economy data too did not help. Industrial production for February declined by 3.6 percent primarily due to contraction in manufacturing and mining sectors. India’s retail inflation for March rose to 5.52 percent, WPI surged to 8-year high of 7.4 percent due to combination of base effect and rise in crude, petroleum products and basic metals. However, it did not harm the market sentiment as it was in-line with recent the RBI policy forecast.
What is going to define the trend of the market, in the near-term, is how stringent would be the lockdown-norms, effect on the economy and fall in consumer spending. The understanding is that the implication will be low because economic activities is maintained through digital and work-from-home model.
The least impacted and beneficiary will be companies that have a dynamic and strong digital platform to maintain and grow its operations, marketing and distribution. Health experts’ view is that India is expected to cross the peak infection rate in the coming weeks. After that, we can expect the market to stabilize positively.
The market is expected to have a stock-centric rally in the coming days with a focus on Q4 results. IT and Banking stocks will be in focus at the starting phase. The start to IT results are largely in-line, which may trigger short-term correction which should be used as an opportunity for building long-term position.
Banking stocks will remain on the radar, with a negative bias, given the impact of the Supreme Court judgement on banks’ asset quality and income recognition, for refunding compound interest of loans over size of Rs 2 crore.
Market is becoming more cautious, underperforming world equity, as states are increasing restrictions. Growth-oriented sectors and stocks are losing momentum while defensives like Pharma, FMCG and IT are gaining.
However, states will not opt for a complete lockdown like last year, which is a relief for the market. But high valuation will also deter direction in the short-term, triggering a consolidation phase.
As soon India is able to find the peak of the infection level, the phase of consolidation will also end with a positive bias on growth sectors like Chemical, Pharma and Industries.
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