Benchmark indices have staged a rally of almost 20 per cent, since hitting near 4-year lows in the month of March. Global markets have also seen a sharp reversal in the last few weeks. However, volatility in the markets is unlikely to go anytime soon.
Mutual fund inflows in the next few months to remain key
In the months of Feb and March put together Foreign Portfolio Investors (FPIs) have net sold in the cash markets to the tune of Rs 77,000 crores. A substantial part of this was absorbed by domestic financial institutions, including mutual funds. In fact, they net bought in the cash markets to the tune of Rs 71,000 crores. A lot of this inflows had to do with the money being poured in by retail investors, through mutual funds.
The question that now arises is: would the steady inflows into mutual funds continue, given the way the stock markets have cracked? Investors who had been investing may discontinue their SIPs, if their cash flows deteriorate or they are rendered jobless. There could be some tapering of flows into mutual funds in the next few months. If this is supplemented by aggressive selling by FPIs, we could see further downside in the markets.
Markets await a second stimulus
Investors are eagerly awaiting a second stimulus from the government. This is expected in the next few days. The worry is that stimulus measures could expand the fiscal deficit of the country. At the same time, sovereign rating agencies would keenly the fiscal deficit number and could take action on sovereign ratings accordingly.
Things look precariously poised at the moment, which could put some pressure on the markets. The first quarter numbers for FY 2020-21 of most corporates are at best going to be disastrous.
It's difficult at the moment to hazard a guess on when infections from the covid-19 would abate. Nobody would like to predict anything at the moment. If the lockdown remains prolonged we might see further pressure on equities.
Globally things are not looking good
Globally things are not looking too good with a sudden crash in oil prices. Crude oil prices turning negative and falling below zero is frightening.
On the other hand a sudden rise on Covid-19 infections in China and re-lapse in some cases is a reason to get a little more worried.
As things stand the chances of a further downside in the market cannot be ruled out. Investors who are really prepared to hold for the long-term might ending-up making some money. For short term investors, the volatility in the market does not warrant any kind of investment at this stage.
Those who have invested should stay invested, as selling in the markets, would only mean booking losses.
The only sector that is slightly better insulated at the moment is the pharma sector. As far as the FMCG sector is concerned, prices have run-up very fast already. Buying into banking stocks, especially the smaller players should be avoided at the moment, give that NPAs could swell in the coming quarters.