Friday's market surge may be temporary; traders need to be cautious

With net inflows of Rs 5,868 crore from domestic investors, leading indices closed with gains of over 4%

When trade was halted across the global markets a night before and despite federal and state interventions, they closed in the red, none would have expected the Indian markets to react differently. On Friday morning, after the Sensex locking in the lower circuit at 29,339, the dramatic recovery once trade resumed was something never seen before.

Many factors came to play. The US’ Dow Futures trading positively lifted the mood for the Asian markets, including India. Another major leg-up came from the rupee, which made some comeback after hitting an all-time intraday low of 74.15 to a dollar. An interesting component was the concerted efforts of domestic institutional investors (DIIs), who drew strength from these positive cues. Comprising mutual funds and insurance companies, DIIs’ Rs 5,868 crore of buying rescued leading indices to comfortably close with over 4 per cent gains, helping prevent a repeat of last week’s Black Friday.

“We have been getting daily positive inflows and gradually deploying them in the market. Today, we deployed it more aggressively and it is to do with our belief that things are looking better,” says Chandrapra­kash Padiyar, senior fund manager, Tata Asset Management.

Without naming stocks, another head of investments at a mutual fund said the one-time window of buying opportunity in some blue-chip stocks was tempting. State Bank of India, Tata Steel, and HDFC were among large-cap stocks with gains of over 10 per cent on Friday, while Sun Pharma, Bharti Airtel, ONCG, and NTPC gained 4–8 per cent.

Opportunities like Friday don’t come often and there are reasons to be cautious. “If one were to correlate FY21 estimated earnings growth and valuations, in the scenario of global trade halt, valuations aren’t particularly cheap yet,” said a fund manager. While FY21 estimated price-earning (PE) has melted to 14x, compared to 2008-09, when there was a similar situation of the global economic meltdown. The markets then were trading at 10 –12x PE. Hence, experts say it is tough to rule out more correction.

BofA analysts led by Sanjay Mookim, in an equity strategy note say, though the markets are down 20 per cent, it’s still not the time to buy. “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,” they said. This may lead to broader-than-normal earnings cuts for the next few quarters.

“Even Friday’s trade data indicates that wherever possible, DIIs may have sold into the recovery and this is a very typical characteristic when we expect the markets to remain volatile,” said another fund manager.

That DIIs are not entirely matching up to foreign institutional investors’ (FII’s) net selling is also an indicator of their tepid conviction. Therefore, unless there is some cooling-off in FII selling and coronavirus spread, the markets may remain volatile.