Coronavirus | Why has the stock market been so volatile?

How long will the bear phase last?

March 29, 2020 12:30 am | Updated 02:03 pm IST

The story so far: On Friday, even after the Reserve Bank of India announced a slew of measures to boost the economy in the time of a pandemic, shares fell 1% to close at 29,416 points. The stock market has seen a lot of volatility with the benchmark Sensex having fallen as much as almost 40% from the highs it touched in January.

Where was the Sensex in January?

On January 20, the Sensex touched an all time intra-day record high of 42,274 from where it fell a massive 16,635 points to touch a 52-week intra-day low of 25,639 points on March 24. This assumes significance as a fall of over 20% is typically looked upon as a bear phase in the markets. While the 30-share barometer has recovered 4,177 points or 16% from the lows, it is still experiencing a lot of volatility with underlying weakness. Incidentally, the India VIX index, which is considered a measure of near-term volatility in the market, has surged more than six times this year, rising from 11.7 in December to the current levels of 70.4. The intensity of the fall can be further gauged from the fact that the current month has seen the indices hitting their lower circuit breaker of 10% on two occasions while registering some of the biggest single-day falls as well.

What is the reason for the huge plunge?

The single biggest reason of the ongoing volatility and fall is the global coronavirus pandemic. In India, the number of coronavirus cases stand at a shade below 1,000 (as on March 28) even as the country is in the midst of a 21-day lockdown as part of the government’s attempts to curb the spread. The pandemic has led to concerns that global economic growth will get deeply affected. The International Monetary Fund (IMF) has already said that the world has entered a recession that is as bad or worse as 2008 when the global financial crisis happened. In India, investor concerns have led to foreign portfolio investors (FPIs) selling equities worth nearly ₹60,000 crore in the current month, the highest ever single month sales by overseas investors.

Is selling happening across all sectors?

An across-the-board selling frenzy has gripped the markets with no sector insulated from the sell-off. Banking and financials, however, have borne the brunt as investors believe that the economic impact of the pandemic will lead to a rise in bad debts of such entities. Sector heavyweights such as HDFC, ICICI Bank, Axis Bank, State Bank of India, IndusInd Bank and Bajaj Finance, all part of the Sensex, have fallen significantly with some currently trading near multi-year lows. Automobile stocks have also been among the worst hit as most plants are shut on account of the lockdown. Some of the pharmaceutical and fast moving consumer goods (FMCG) stocks have been able to stem the fall to a limited extent though they are currently significantly lower compared to their highs.

Is anything being done to address investor concerns?

Globally, governments and regulators are taking initiatives in the form of stimulus measures to support the economy. For instance, the U.S. Senate and House have approved a $2-trillion coronavirus relief package. Earlier, the U.S. Federal Reserve announced a $700-billion stimulus package. In India, the Reserve Bank of India (RBI) reduced the key interest rate sharply by 75 basis points and allowed equated monthly instalments (EMIs) to be deferred by three months. The repo rate has been reduced by 75 bps while the reverse repo rate has been cut by 90 bps. Further, the cash reserve ratio has also been reduced that will release ₹1.37-lakh crore liquidity. Cumulatively, the RBI measures will lead to an infusion of ₹3.74-lakh crore into the banking system. The Securities and Exchange Board of India (SEBI), on its part, has relaxed many compliance requirements while tightening the norms for short selling and margins to ensure the smooth functioning of the equity markets.

What is the outlook?

The consensus estimate is pessimistic due to the lack of any positive triggers. While policy makers worldwide are trying to provide stimulus, the uncertainty around the pandemic has made investors risk averse. They feel that since the current crisis is not due to a liquidity crunch, as was the case during the Lehman crisis, it is difficult to counter it with mere liquidity infusion. Most analysts expect the pandemic to affect corporate earnings over the next few quarters. Global financial major Morgan Stanley has lowered its year-end Sensex target by a little over 11% to 32,000, from the earlier 36,000, even as it believes that the current bear phase in the stock market is close to its bottom. Analysts are unanimous in their view that the pandemic will hit India’s growth rate and hence risky assets like equities are seeing a sell-off from investors across categories.

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