Friday was a historic day in the market, not because Sensex and Nifty hit their 10 per cent lower circuit limits, but because of the near impossible recovery that not only erased steep losses of the previous session, but also rendered 4 per cent gains at close. The Sensex recouped a massive 4,714 points from day's low to settle the trade at 34,103.48.
Should this rebound be seen as a buy signal? Not yet, say experts. The fear quotient is high. Volatility index India VIX jumped 24 per cent to 51.22 level for the day. The fear gauge suggests the likely volatility in the market over the next 30 days. On the other hand, the Sensex is almost in bear territory, down 8,171 points or 19.32 per cent from its all time high of 42,273.87 points hit on January 20, 2020.
"Sentiment around COVID-19 is driving global equities. Several large economies still need to contain the virus. This may require more drastic lockdowns and economic checks. That could drive a market undershoot. At least in India, this is not a 'Kid in Toy Shop' moment. Unlike in 2008, quality, steady growth stocks are still far from being cheap," says BofA Securities in a research note.
However, this is also not the time to sell. If the proverbial doomsday is making you jittery and you consider pulling out your money from the markets, this could prove the worst decision to take at this juncture, said analysts.
"Currently, fear of deep economic recession is creating havoc in the markets. Incessant fall in stock prices can be attributed to algorithm based momentum selling, forced technical selling on account of deleveraging of long derivatives and margin funding positions. Retail investors should not panic and stick to their asset allocation strategy," says Devarsh Vakil, Head - Advisory (PCG), HDFC Securities.
In fact, this is the time when you should keep your shopping list ready. "Situations like these are great opportunities in the stock market, but one should avoid bottom fishing when we are still in midst of the problem. We should await clarity on topping out of the coronavirus numbers before venturing out to buy - even at a higher level than where we are today. Nevertheless, one should be prepared with a buying list because it is difficult to call a bottom till we see the coronavirus data topping out across the globe similar to what we are witnessing in China," says independent market analyst Ambareesh Baliga.
Which pockets will recover first?
Banking stocks, especially private banks, will drive the rally when that happens. BofA Securities suggests two approaches as you look for the buying opportunities - stocks that have fallen the most (exporters / global cyclical) along with large cap stocks that have contributed most to the index's fall (RIL, HDFC, ICICI, Infosys). Secondly, the brokerage advises to stick to quality and low leverage stocks as without economic growth subsequent performance will remain with a narrow set of such stocks.
"On both counts, private banks stack up well. We recommend 'buy' on HDFC Bank, ICICI Bank and IndusInd Bank," says BofA Securities.
Private sector banks have been continuously gaining market share from PSU Banks thanks to their high grade technologies and professional management. Meanwhile, PSU banks suffered due to rising NPAs and weak governance practices. "Private sector banks with strong and profitable loan growth and stable asset quality make for attractive buys," says Vakil of HDFC Securities.
He expects financials sector as a whole to continue outperforming the markets, on back of ample liquidity and large market opportunity to expand their business. "Large cap stocks - especially stocks in derivatives segment will see the fast recovery on back of short covering," he adds.
Sectors such as cement, pharma, FMCG, speciality chemicals are few other notable pockets that you should look at. "We will have to look at sectors where there would be demand. I expect the government to focus on Infrastructure to kick start the economy. Global buyers would be looking to de-risk their supply chain from China by looking at other regions. India should be one of the major beneficiaries of this shift," says Baliga.