Covid19 Pandemic – The Catalyst for the crisis in Indian Markets

Post Covid19 Pandemic – What is ahead for Indian Markets

Covid19 pandemic has shackled the world economies and the indices across the world have tested new bottoms. Indian markets are no exception this time. Though India has sustained many historic black swan events, this time the situation for India and challenges ahead is completely different. The Indian stock markets have tested new bottoms and are only recently that the bulls are back into the markets.

On March 23, 2020, Nifty50 closed at a low 7610, from a high of 12000 in January 2020. The only thing that made the market fell is the pandemic that is spreading across the globe and is making the investors panic. There are huge selling and caution play done by investors in global markets. With the emergence of covid19 and slow spreading of it to different countries drove the markets to test new bottoms.

In India, the situation may seem quite similar to global markets, but there are exceptions. The Indian economy is already suffering from internal issues. This was the time when the GDP number of India are on the decline after reaching a peak in 2017. There are also reports of huge unemployment in India which has become a huge challenge for the government.

The demand in the market is on a slowdown and many industries have already posted the decline in the sales QOQ.

This already existing impact was augmented by the global pandemic. These events made the Indian markets suffer and the result is quite obvious. There is a panic button that has been pressed among investors and huge selling is seen which made the stock markets reach its bottom in March 2020. During this time the investors were already were of the perception about the weak financial results of the companies.

The largest sector in terms of GDP and Employment in India is the Auto Sector which accounts for almost 40 Million Jobs and 10% GDP. The sales of Auto industry were already on Decline quarter over quarter and many jobs are being lost during this time. Reports suggest that sales in the auto industry have hit 2 decades low in January 2019.

With the emergence of lockdown in the Indian markets made the industry faced declined sales. With low income, the consumption is going to fall for some time. And in the middle of all this, the industry to sustain in the market will layoff many people. This resulted in the drop of major auto stocks and credit ratings have estimated that few stocks will test a new bottom in Auto Sector.

Issues in Banking Sector

Everyone must be aware of the famous IL&FS, DHFL and Yes Bank crisis the made the banking sector see the worst time. If you are unaware of the crisis know in short about the crisis below.

IL&FS: Il&FS is the core investment company. IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on the due date—which means the company has run out of cash or it is facing a liquidity crunch. Read More

DHFL: DHFL is a housing finance company. After the crisis of IL&Fs there is a liquidity crunch in the market in the middle of this there is a news that came out that the promoters of DHLF were involved in money siphon. The news made the company fell into a difficult situation and had to sell a lot of assets for liquidity. And it had eventually failed to pay resulting in downgrading by rating agencies. Read more here

Yes Bank: The case of Yes bank is an Eye-Opener for the private banks in India. The bank has seen a large increase in NPA and eventually there is news that spreading about the involvement of the founder in some illegal activities which eventually made the central government and RBI step in to take charge of the Board and plan a bailout plan. Read more here

These events made the banking sector in India to suffer and this was augmented by the covid19 pandemic. Fear of an increase in the NPA due to no income and loss of employment by many due to losses in many companies made the Banking sector fell. Liquidity is the main problem right now and RBI has to provide considerable measure to help banking sector

Agriculture Sector – Probably Resilient to Covid19

Coronavirus has impacted many sectors but the agriculture sector is expected to see very less impact. According to a report, the agriculture sector is going to see a 2.5% growth. The areas that get affected are the Horticulture because of lockdown. And also as there is a drop in the rooms restaurants and hotels, there is an expected drop in the demand for dairy products. But as soon as the lockdown is removed these products seem to gain the demand. Fall in the exports might be seen as a bad effect and may affect the agriculture sector.

Even the central government has increased the MSP for 14 Kharif crops which will make the farmer get 50% returns on the production.

Going forward as soon as the lockdown is lifted and life returns to the normal different sector has to wait for some time to return to normal. But the agriculture sector seems to return to normal demand very soon compared to other sectors. The household consumption has not seen a hit due to lockdown according to the report.

COVID19 Effect on Indian Markets and Way ahead

The is obviously uncertain for many countries. In Indian also the number of cases is increasing day by day. Today (June 4th 2020) the number of daily cases is more than 9000. With no evidence of a decrease in the cases the markets are moving cautiously.

The bulls are trying to slowly enter the market with the view that the trial for the vaccine will be successful and the market will rebound soon. but there are still bears that are still on panic mode with selling continued on alternate or someday of the week. With bulls want to enter at the present bottom and Bears want to play cautiously the market in oscillating. This is a very high volatile situation and volatility in the markets will make the market unpredictable.

The sentiment in the world economy is gloomy and is visible in the movement of the market across the globe. Even some tried to categorize the covid19 as the black swan event with respect to some of the world most devastating events such as the global recession of 2008.

But the stock market history reveals that the market has a Crash and Recovery and Indian market will also fall into this. Sensex plunged 53 per cent in one year in “Harshad Mehta Scam” (1992) but recovered 127 per cent in 1.5 years. During the “Asian Crisis” (1996) Sensex dipped 40 per cent in four years but recovered 115 per cent in one year. During “Tech Bubble” (2000) Sensex crashed 56 per cent in 1.5 years but recovered 138 per cent in 2.5 years. When the US faced the “Real Estate – Lehman” crisis (2008) Sensex crashed 61 per cent in a year but recovered 157 per cent in 1.5 years. The current market has crashed around 30 per cent in less than three months. Due to COVID-19, no one knows when the economy will be back on track. Some Experts even compare this meltdown of economies with the “Great Depression” of the 20th Century. The “Great Depression” started in 1929 and lasted until the late 1930s. Between 1929 and 1932, worldwide Gross Domestic Product (GDP) fell by an estimated 15 per cent. By comparison, worldwide GDP fell by less than 1 per cent from 2008 to 2009 during the Great Recession

So Historic data suggests that there will be a sharp recovery with the bulls trying to enter the market at lows when the situation is becoming stable and returning to normalcy. but it is only a simple question of when is such moment probable to happen in COVID19 pandemic situation.

Experts believe that the present volatility in the market can only be reduced if there is a vaccine that gets approved for the treatment of COVID19. The is the main catalyst that can bring back the sentiment of the investors and bring the market to rebound state. Historically the trade will rebound sharply that it will be in no time that you will see it reaches the new normal level.

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