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Last Updated : Jul 01, 2020 12:18 PM IST | Source: Moneycontrol.com

Sensex, Nifty shed 15% in first half of 2020; will the trend continue or change?

Equity markets had a plethora of headwinds during the first half of the calendar year 2020. From geopolitical tensions to deteriorating macro to COVID-19, the beleaguered market kept investors on tenterhooks.

As the first half of the eventful year, 2020 is over now, it is time to examine the trends and anticipate what the next 6 months will be like.

Equity markets had a plethora of headwinds during the first half of the calendar year 2020. From geopolitical tensions to deteriorating macro to COVID-19, the beleaguered market kept investors on tenterhooks.

Both Sensex and Nifty50 fell by 15 percent each in the first half of the year 2020, compared to 13 percent fall seen in the S&P BSE Midcap index, and 10 percent decline seen in the S&P BSE Smallcap index.


Most sectoral indices suffered losses, barring BSE Healthcare which surged 21 percent and BSE Telecom which jumped 17 percent.

Among the sectoral losers, banks, realty and metal lost most, falling 34 percent, 31 percent and 31 percent, respectively. BSE FMCG lost the least, just 1 percent.

Will the trend continue or change?

Despite the recent rally in the market, the uncertainty prevails due to the coronavirus pandemic. As long as COVID-19 does not come under control, the cloud of uncertainty will continue to loom.

The market is witnessing huge divergence as the macroeconomic situation is completely different from the movement of indices.

"The rally is due to pockets of stocks showing strength while the broader indices are still weak. Investors are looking for avenues to invest and are inadvertently inching towards the already strong performing large-caps. This in turn is taking the prices up further while the situation at the grassroots level worsens," said Nirali Shah, Senior Research Analyst, Samco Securities.

"But prices will soon align with the economy and markets will correct. And only when this happens and the tide goes out can we learn who has been swimming naked. Hence, it is better to be patient and invest selectively only in companies that have high cash, robust books with minimal to zero debt, high return ratios, strong management and a smooth working capital cycle. Allocate capital in various asset classes to remain diversified," Shah said.

Experts point out that at present, the market is at the top-end of the cycle and a short consolidation will be good for the market.

Vinod Nair, Head of Research at Geojit Financial Services said, pre-COVID he had a one-year forward target of 12,500 for Nifty50 which is downgraded to 10,500, due to fall in earnings growth and outlook.

"We were suggesting a range of 9,500 to 10,500 for Nifty50. Currently, Nifty50 is at the upper-side of the range. After touching the 200-days moving average of 10,520, it has moved down. The next strong support is at level-1 of 10,050 and level-2 of 9,800," said Nair.

Nair believes the best level could be 10,900. The sensitivity of the scenario is widely open on both sides with huge positivity and negativity if we have vaccination or fall in a virus threat, and vice versa.

While the economy is expected to gradually recover, the possibility of a sharp rally in the market looks feeble as the valuations have got stretched.

"Considering the potential threat to GDP growth, FY21 and FY22 earnings could be at big risk. Hence, valuations on FY22, which look optically lower today could gradually move higher in light of the potential risk to future earnings. The risk-reward ratio in large-caps has turned unfavourable. The Nifty50 is trading at 21 times on forward earnings, which seems to be on the very higher side," said Rusmik Oza, Executive Vice President and Head of Fundamental Research at Kotak Securities.

"In the best-case scenario, Nifty can go to 10,900-11,000 if global markets rally further from here. On the downside, we cannot rule out 10-15 percent correction in Nifty50 if Q1 results disappoint strongly," said Oza.

The recent rise of the market has been broadly attributed to the liquidity boost by the governments and central banks.

Jyoti Roy, DVP Equity Strategist, Angel Broking points out that a stimulus package coupled with opening up of the economy from June has led to an increase in economic activities which has helped market sentiments.

The rural economy continues to remain a bright spot and has been doing well despite the COVID-19 crisis and a good monsoon will be a shot in the arm for agriculture and the rural economy.

"A strong rural economy coupled with increasing economic activities due to opening up of the economy will help mitigate the pain caused by COVID-19 crisis," Roy said.

Roy expects equities to continue its outperformance in the near-term though there could be bouts of volatility later on if there is a significant increase in COVID-19 cases in India.

"Though India has managed to contain the virus so far by enforcing one of the strictest lockdowns globally, there has been a steady increase in new cases which coincides with the opening up of the economy and is a key risk to the current rally," Roy said.

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First Published on Jul 1, 2020 12:18 pm