Virus slams brakes on runaway stocks

The Nifty and Sensex tanked by 1.4% and 1.3% respectively, their worst fall since 26 October, as Singapore revived mask mandates and issued a travel advisory amid the spread of JN.1, a new sub-variant of the novel coronavirus causing covid-19. India has recorded 21 cases of the new sub-variant so far, and the Centre has asked states and Union territories to maintain vigil.

The broader markets saw a bigger fall, with the Nifty Midcap 150 and the Nifty Smallcap 250 tanking over 3% each.

Nilesh Shah, managing director, Kotak AMC, said that anecdotally, after a rally as long as the latest leg, markets have tended to correct.

“Wednesday has shown us that markets can’t move in a linear fashion. The past 30 years have shown us that markets tend to correct after a seven-week-long rally,” Shah said. “The triggers could vary from valuations to geopolitical events or, as we are seeing right now, covid.”

Fear gauge India Vix rose by 4.2% to 14.45, its highest level in a little over two months.

“Resurgence of covid was an excuse to book profit in the market, which was looking a bit stretched,” said A. Balasubramanian, managing director, Aditya Birla Sun Life Asset Management.

According to Balasubramanian, certain categories of stock trading at steep valuations after a 40–50% surge in mid-cap and small-cap indices since March could bear the worst of a correction, given that India’s nominal GDP growth rate plus risk premium and India premium still add up to only 18–19%.

“A correction of this kind is good because it makes people aware that outsized returns can’t continue forever. Those investing for the long term could continue the allocation method to multi-asset fund (equity, debt, gold), while hot money finds its way out of the market,” Balasubramanian said.

Foreign portfolio investors (FPIs) sold a provisional ₹1,322 crore worth of shares while domestic institutional investors (DIIs) net purchased shares worth ₹4,754.34 crore, implying that retail investors would have sold much more to account for the fall.

Stocks that faced the worst selling on Wednesday included the Adani twins—Adani Ports and flagship Adani Enterprises—which fell around 6% each, and commodity stocks such as Coal India, UPL and Tata Steel which tanked 4–5%.

Among the small-caps, the worst hit were commercial services and supplies company Rattan India Enterprises, Indian Overseas Bank, Indiabulls Housing Finance, and Uco Bank, which fell over 10% each.

Mid-cap counters that bore the brunt of the volatility included IRFC, PB Fintech (PolicyBazaar), Piramal Enterprises, Yes Bank, and Indus Towers, which shed 7.5–9%.

“High-beta counters (stocks more volatile than the index) are bound to be singed more when markets encounter volatility of the type we saw today,” said Siddarth Bhamre, EVP research head, Religare Broking. “The rise in covid cases was the catalyst for the overdue correction. I think we should stay in a 21,000–21,500 range until the end of the current fiscal.”

Bhamre said large-caps such as HCL Tech, Tata Consultancy Services, Eicher Motors, and Maruti Suzuki look good from a “valuation perspective” in the current market.

Occasional sharp corrections are common in bull markets, and according to analysts, a 5–10% fall is possible after a rally that has stretched for seven weeks.

Even as the market roared ahead in the past few weeks, an important indicator of caution was building up: Cumulative bearish index futures bets by retail and HNI investors, nomenclatured “client” by the NSE. The exchange places market participants in four buckets—client, DII, FII, and proprietary.

Of late, the client category has trumped FPIs in timing the markets. For instance, their net long bets in index futures (Nifty and Bank Nifty) stood at 146,411 contracts on 2 November when the Nifty closed at 19,133.25. That’s when FPIs were net short by 176,148 contracts. From 2 November to 4 December, the Nifty rose 8% to 20,686.80. The clients reaped the profit on their long positions while FPIs conceded defeat by covering their short positions.

On 4 December, the clients turned net short index futures while FPIs turned net long. As of 19 December, the clients had taken cumulative net short positions on index futures at 62,075 contracts—the second-highest bearish bets in two years—while FPIs were net long 65,408 contracts.

Rohit Srivastava, founder, IndiaCharts, said it was too early to determine whether Wednesday’s fall was a knee-jerk reaction or the start of a short-term correction.

Samir Arora, founder and fund manager, Helios Capital, termed Wednesday’s volatility as a profit-booking excuse that people were waiting for.

“It is an excuse because the market was running up every day, and so needed some reason to correct and remove the pile-on buyers,” Arora said.

Valuations have soared since the latest run of the rally from the low of 18,838 on 26 October until the 20 December closing of 21,150.15. For instance, the Nifty one-year forward price to earnings ratio rose from 17.36 times on 26 October to 19.9 times currently after the Nifty’s 12% rally from the 18,838 low in October.

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Published: 20 Dec 2023, 11:14 PM IST