Coronavirus and beyond— reasons why this is not ideal time to buy stocks in India, according to experts, money managers, and researchers

• Only 40% of the stocks have regained the levels before the pre-budget sell-off, an expert said.
• The coronavirus epidemic has dent sentiment in global markets but there are other reasons keeping stocks depressed.
• About 49 stocks hit a 52-week low in trade today ranging from travel operators to infrastructure companies to milk manufacturers.
  

The sell-off in Indian stock markets post Finance Minister Nirmala Sitharaman’s latest budget took the Sensex down to 39,735. Since then, it has recovered a net of over 2,000 points (over 5%) in five trading days.

In fact, the government cheered the recovery in the market as a vote of confidence from investors for the budget that has, at best, evoked mixed reactions across the board. The Reserve Bank of India (RBI) too, fuelled some of the rally with some big announcements aimed at reviving specific sectors.

The sell-off on Friday and Monday has been attributed to the outbreak of coronavirus, whose death toll has surpassed that of SARS. But that may not be all the reasons.

Digging deeper into the data, an expert concluded that only 40% of the stocks have regained the levels they were at before the budget-day sell-off. This, despite the fact that the coronavirus epidemic has led to fears of fall in demand for crude oil that has, in turn, brough forecasts for Brent Crude down to as low as $47 a barrel.

In January alone, global crude oil prices fell by about 15%, according to HDFC Securities. The fall in oil prices should have ideally propped up the Indian market but last week’s rally in Sensex fizzled out on Monday (February 10).

The Monday crack on Dalal Street (home to the Bombay Stock Exchange) would have been obvious to those watching the futures and options data. “The open interest (OI) activity all the while, when Nifty was rising, did not seem to have agreed with the argument of everything is fine, unlike the price action,” Shubham Agarwal, CEO & Head of Research at Quantsapp Private Limited, wrote in moneycontrol.com.

What is open interest?

The number of contracts outstanding in futures and options trading on an official exchange at any one time.

These contracts can be ‘long’ (where the trader is betting the stock/index will rise in the days to come) or they be ‘short’ (where the trader is positioned for a fall in the stock or index).

For instance, today (Feb 10) at 11:42 pm, the price of Nifty 12,000 Put had nearly doubled since last close with a rise in open interest. This would indicate that more people had bet on Nifty falling to that level and it did. The Nifty was trading at 12,007, down three-fourths of a percent for the day.

This concentration on Nifty 12,000 Put also means that the index may bounce back from that level. However, Agarwal ruled out a runaway rally.

There are others who agree. “Nifty50 has decisively broken the trendline and the correction seems to be deepening. The steep fall is expected to have sharp bounces in the near term,” Jimeet Modi, CEO, Samco Securities & StockNote wrote recently.

Making matters worse, Indian stocks are already 40% more expensive than their peers in Asia, according to an HDFC Securities report dated February 4. “Overall, for the week, Nifty could range between 11,930 and 12,250,” said a report from Aditya Birla Money today.

Where is the big foreign money flowing into?

Foreign portfolio investors (FPI) put in ₹6,350 crore in Indian debt between February 3 and February 7 but pulled out ₹1,172.56 crore from equities. That would again indicate that foreign investors are not very keen on Indian equities.

Around 49 stocks fell to touch their 52-week lows on the National Stock Exchange on Monday— from tourism operators to infrastructure companies to milk manufacturers— the sell-off is broad based.

Some of the stocks that hit a 52-week low today:

1. Thomas Cook
   
2. Vardhman Holdings
   
3. Bharat Heavy Electricals.
   
4. Birla Tyres
   
5. Gayatri Projects
   
6. Himatsingka Seide
   
7. Jayant Agro Organics
   
8. Parag Milk Foods
   

While the benchmark index was rising as people bought into some major stocks, more traders were betting the overall trend is likely to be down. “In the near-term markets may gravitate back towards large-cap quality and defensive stocks and we may see more of polarisation with a few mid and smallcaps also participating,” HDFC Securities said last week.

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