The still unknown risk that coronavirus poses to the global economy is wreaking havoc on investor sentiment. The alarm sounded on the markets last week, as the number of coronaviruses outside of China increased. Markets fell as investors pulled out of risky assets. With the global economy now facing unprecedented risk from coronavirus, stock market investors may continue to liquidate their positions.
Travel restrictions around the world and slowing global trade will cost the global economy billions of dollars in lost trade. The US Fed is expected to cut rates to boost investor sentiment, but even this balm could not stimulate global markets enough.
To top it off, the Reserve Bank of India (RBI) has placed restrictions on Yes Bank depositors, while a bailout plan is being put in place by the State Bank of India. Sure, but the SBI must act quickly to restore investor confidence and assure investors that things are moving.
But the RBI’s zeroing of level 1 bonds can provoke an aversion to credit on banks’ level 1 bond capital. Mutual funds and institutions hold these bonds and, in turn, several individual investors who may need to write off these investments. Indeed, the Indian markets were wary of high-risk credit instruments, which could now worsen.
There is a lot going on elsewhere in the markets. The rupee violated the ₹74 brand, which augurs badly for the investments to come in the country. However, a drop in the price of oil could well be the saving grace that the Indian economy needs, otherwise inflation would have soared.
Nonetheless, foreign investors continue to put pressure on sales. In a few trading days in March, foreign investors have already sold ₹10,700 crore of actions. Note that in February, foreign investors sold ₹12,684 shares worth crore. Domestic investors try to match the sale with an equal amount of purchase which does not help the markets much. The Nifty has lost 11.6% since or about 1441 points since its recent peaks in February. This could keep the markets at the peak in the coming weeks.
Unless of course, some of the high frequency data that will be released this week, such as the Industrial Production Index for January and the Consumer Price Inflation (CPI) figures for February, are surprising. Higher industrial production will raise hopes that the economy will try to recover, while a drop in the CPI will open doors for the RBI to cut rates.
However, companies are still facing difficult times. Demand for steel is going through a difficult period, which could cloud the outlook for iron producers like NMDC. The Chinese slowdown has also taken the spinning industry on the wrong foot.
Some pharmaceutical companies have increased due to the expected increase in sales of drugs such as IPCA. But their actions may have been expensive.
It currently appears that more risk aversion is at stake in the global and national economy. The resumption of volatility has triggered massive cuts in world trade, which could be an overhang in the markets.
Domestic investors continue to bear the burden of maintaining the markets even though the flow of funds to mutual funds has remained stable. This could help keep markets buoyant. Analysts said markets could find support at around 10,500 to 11,000 levels. But even that seems to be in danger now.