Market crash is valuation play, coronavirus just the scapegoat

The domestic equity market experienced a massive decline during the week gone by in line with its global peers. Panic guided the bourses and the entire world was blaming the coronavirus for the erosion of wealth.

But when one looks back in time, several instances point to an entirely different scenario. A century ago in 1918, an epidemic of a similar grade Spanish flu created a deadly turmoil in the US, taking lives of 20-50 million people and affecting around one-third of the planet’s population.

But despite this pandemic being the deadliest in history, Dow Jones Index steadily rose throughout the year from 76 to 81. Isn’t that surprising? Actually not, because right before the outbreak, the US Index had heavily corrected because of the catastrophic impact of the World War I. As valuations were already reasonable, there was little room for the market to correct further, which was exactly why despite the flu markets went up.


Cut to now, India is following a similar yet opposite situation, and an analogy can be drawn from the past. The Indian market has been trading at higher valuations and, hence, a correction was needed to align it as per the mean reversion theory. Hence, this week’s fall is a valuation play with coronavirus as the scapegoat.

The frothy valuations needed the market to correct and, hence, investors should slowly and steadily pick reasonably valued quality stocks through the SIP route.

Event of the Week
This week’s fall in the market can be attributed to FIIs, who have been aggressively removing flows out of the country. On the contrary, the surprising fact was that DIIs were net buyers this week till Thursday.

While coronavirus has managed to propel FIIs to pull the trigger, gold, the safest asset class, is on a journey to make new highs. This possibly signals that globally investors have taken a back seat to try their hands in such a volatile market.

Technical Outlook
After two weeks of indecisive movement, Nifty formed a Big Bearish Candle caused by negative global sentiments on account of coronavirus. On the weekly charts, Nifty and Bank Nifty were still trading in an upward sloping channel. On the monthly charts, this fall seemed like a mean reversion opportunity for investors, who have a long-term view. Short-term traders should remain on the sidelines as VIX is ruling extremely high. Nifty’s next immediate support level is at 11,100.

Expectation for the Week
In the forthcoming week, all eyes would be glued on the most awaited SBI Cards IPO and RITES OFS by the Government of India. No matter what the outcome is, markets would broadly be driven by the virus and global sentiment. While it would be impossible as well as futile to predict the pangs of the market, it will be wise to rely on the wisdom of Sir John Templeton during this bloodbath: ‘The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.’

Hence, investors should cherry-pick quality stocks in a staggered manner as every dip seems to be a good buying opportunity. Nifty closed the week at 11,201, down 7.3 per cent.