Analysts warn of volatile market ahead

Equity, rupee and bullion markets to remain vulnerable amid global risk-off sentiment

By   |  Published: 25th Mar 2020  12:03 amUpdated: 24th Mar 2020  9:32 pm

Hyderabad: The Indian stock market suffered worst-ever single-day crash on Monday, with the benchmark indices plunging about 13.15 per cent, eroding Rs 14.22 lakh crore of investor wealth. Sensex climbing 692 points on Tuesday hints at volatile times, not ruling out the negative sentiment prevailing in the market over the rising Covid-19 cases worldwide, point out experts.

Presenting the near-term outlook, Institute for Advanced Studies in Complex Choices (IASCC) co-founder Anil K Sood told Telangana Today, “It is likely to be a volatile week, as we are still uncertain about the economic impact of Covid-19 and how the governments globally would respond to the need for economic stimulus. We are faced with an unprecedented health crisis, which has serious economic consequences. If the governments see it as a problem of financial market which can be solved through monetary policy instruments, they will be solving the wrong problem. It will not help if the governments resort to cut interest rates and not provide enough support to families that have lost work or SMEs that have lost business. We have seen that in the US, where the emergency rate cuts have not helped at all.”

“I expect the volatility in the Indian market to be high, as we are impacted not only by the Indian government’s response but also how the governments in advanced countries respond and how global investors view the opportunity in India. While these investors see India as a long-term investment opportunity, they tend to liquidate their positions at the margin (a small percentage of their total investment), which sets the market for a roller coaster ride,” he added.

Continuing wealth erosion

According to the Federation of Indian Chambers of Commerce and Industry (Ficci), greater uncertainty about the future course and repercussion of Covid-19 has made the financial market extremely volatile, leading to huge crashes and wealth erosion, which in turn is impacting consumption levels. With equity markets likely to remain volatile in future, further wealth erosion of investors is expected.

When asked if the government should consider temporarily shutting down the stock market as the investor wealth is eroding over the last few weeks, Sood said, shutting down a market is the last resort and is likely to be effective only when we know that the investors would stay invested in their positions once the market opens. If the investors see that the problem has been resolved or is likely to be resolved in the short-run, the selling pressure will ease and the market will stabilise.

One of the reasons for market volatility is the leverage buying that takes place through derivative (commodities, precious metals, currency, bonds and stocks) markets. There is a need for regulation of derivatives markets, where the institutional investors build large speculative positions for trading gains.

Sood noted, “We are currently seeing a large unwinding of foreign portfolio investor (FPI) positions in India and many emerging markets. I am not surprised at the pace of selling in India, as the Indian market, like many global markets, had got ahead of itself.”

Rupee vulnerability

On the currency front, rupee is vulnerable largely as a result of FPIs taking out money from India, out of fear. It puts pressure as India still runs on large trade deficit. The currency gains arising from lower oil prices is being negated by liquidating of positions by the international financial investors who are rushing to bail out of the market. Emerging market currencies will also experience greater volatility till there is higher visibility into economic impact of the crisis.

Fitch projects rupee will average 77 per US dollar this year and 80 in 2021 amid ongoing global risk-off sentiment.

Gold prices too will remain volatile. It is a financial asset and the price volatility depends on how many financial investors are chasing gold for the so called ‘safe haven’ returns. It is hard to see gold being a safe-haven with so much economic uncertainty around.

Aditi Nayar, principal economist, ICRA, says, “We expect a sharp downturn in various indicators of the manufacturing and services sectors, particularly those catering to domestic discretionary activities, such as travel, tourism and recreation, labour intensive sectors such as construction and transport activities as well as exports from March onwards, which could intensify in April, if the prevailing near-lockdown situation in several States persists.”

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