On Friday, March 13, the positive closing on the Nifty may have been highly deceptive. On that day, the Nifty had touched the 10% lower circuit leading to a trade freeze for 45 minutes in the morning. It is a different issue that the Sensex recovered over 5000 points from the bottom. However, the underlying weakness has come back to roost on Monday, of March 16. Clearly, the sharp fall has been driven by the Chinese Coronavirus pandemic and the anticipated impact on economic growth.
Ironically, as of the third week of March, the Coronavirus casualties outside of China have exceeded the Chinese casualties. Italy, Iran, France, Spain and South Korea are the worst. With Europe becoming the new epicentre of the virus and the US and India seeing a rapid rise in the number of afflictions, the markets went into a free fall.
Which sectors dragged the index lower?
For the purpose of our analysis, we have considered the one month period from February 17, 2020 to March 16, 2020, when the selling was almost relentless. During this period, the FIIs were sellers on all days except one. It is hard to recollect the last time the markets went into such a free fall in such a short span of time. Most of the heavyweights like Energy, Private Banks, IT and Auto lost value in the last one month at par with the Nifty. For the energy sector, it was a clear oil play. With Brent Crude getting close to $30/bbl, the oil heavyweights like ONGC, OIL and RIL took deep cuts. The energy story could have been worse if BPCL had not saved the day. IT index reacted in panic to the sharp slowdown in the US while auto was a clear loser in the China slowdown. Even private banks lost heavily with the heavyweights reacting negatively to the slowdown and to the Yes Bank fiasco.
And, some sectors did worse than the Nifty
There are no prizes for guessing. Metals and PSBs did worse than the Nifty. Metals reacted to a sharp fall in price of most base metals on the LME and fears that Chinese demand could slow. PSBs had to put up with a double whammy. On the one hand, the slowdown raised the spectre of NPAs rising once again. Secondly, the markets were not too pleased with SBI bailing out Yes Bank considering SBI itself has a mountain of NPAs to contend with. Even realty took a hit but we shall not dwell too much on them considering their limited weight.
But, some sectors managed to better the Nifty
There were 3 sectors that clearly outperformed the Nifty. OK, here is a caveat. All of them gave negative returns. In fact, on 13th March when the Nifty touched lower circuit after a gap of almost 12 years, all the sectoral indices touched a 52-week low. That is a rare event that you don’t get to see normally. But coming back to the sectors that did better, MNCs and FMCG were hardly surprising but pharma was certainly a surprise. FMCG stocks also came under pressure on slowdown concerns due to the shutdown. But with a robust online platform at play, FMCG companies may not really take a hit on sales. Pharma was the surprise package. It benefited from the expectation that the supply chain disruption in China would open the floodgates for Indian pharma companies manufacturing APIs (active pharma ingredients). Also, any global pandemic is normally seen as positive for pharma stocks.
Large caps, Mid Caps, Small Caps; they all cracked
Between February 17, 2020 and March 16, 2020, if you look at the market, there was little to choose between the large caps and the mid caps. Check the table below.
Nifty 50 Index
Nifty Mid Cap Index
Nifty Small Cap Index
Data Source: NSE
Ideally, one can argue that weak oil prices should be positive for mid caps but that would work more in the medium term. In the midst of panic, it is a combination of margin positions hitting the stops and stocks getting unwound. That explains why the mid caps and the small caps have also taken a hit. When more than 70% of the stocks hit lower circuits, you can be sure that few will come out clean.
What is the road going ahead? Two things could change the scenario. Firstly, the dividends of cheap oil and a stable rupee will soon be evident in the cost structures of companies. That will be a positive feature. Secondly, the massive infusion of liquidity by central banks and the world getting back to 0% rates should hopefully revive the story in equities. In a sense, that could be a repeat of what happened after 2009.