Brace For More Downside To The Markets Next Week

It was the first time since 2008, that the Sensex dropped 12.8 per cent for the week, capping a terrible week.

On Friday, there was a 5 per cent rally, as global cues were remarkably strong, but next week brace for more downside.

Disastrous economic consequences

As we write, India saw the biggest jump in coronavirus cases in a single day, now taking the tally to 223, a jump of 50 cases in a single day. Several cities like Mumbai, Pune and Nagpur are virtually shut and so is the cases with many cities where malls, cinemas etc., are closed down.

Things are not improving globally either. South Korea and China have now reported new cases and the corporate situation is not good either. Senators are urging Jeff Bezos the founder of Amazon to give workers sick leave, while Boeing has suspended the payment of dividend. UK has announced nationwide lockdown measures.

If the trend goes on for a month or so, it's bound to impact the economy. For the quarter ending March 31, 2020, the results of most corporates are likely to be worse than expected. Nobody is sure how long the pain would last and when the infections would start abating.

Several agencies have now cut India's GDP forecast. Fitch has slashed India's GDP growth outlook for FY21from 5.6% to 5.1%. S&P on the other hand has reduced India's GDP to 5.2 per cent in 2020, due to the covid outbreak. It's likely that we will constantly see agencies downgrading earnings as well as GDP.

What should investors do?

It is not the best time to take money out of the markets. With the Sensex already down 30 per cent from peak levels, not many should be willing to sell at distressed valuations. Most investors are comparing the present scenario to the 2008 global financial crisis. There is a difference though. To a large extent with the Lehman Brothers crisis you could at least ascertain the damage and enable a quantitative easing programme. In the case of COVID 19, one is not certain when the infections would abate and one cannot be sure it will not come back. The longer people are quarantined, the more painful it would be for the economy.

While stocks are falling, gold has seen some decent buying support. The safe haven asset has been on a roll in the last one year or so and could go even higher. With interest rates slated to fall sharply, gold is set for another very good performance.

As for equity investors, nobody knows where the bottom lies. Brace for some more volatility in the coming days.