Indian stock markets are not virus-proof after all2 min read . Updated: 28 Feb 2020, 11:46 AM IST
- Stretched equity valuations are exacerbating the fall
- Bigger issue now is how much global economy will be hit
Just when it seemed like the Indian markets are virus-proof, apart from being insulated from all the bad macro economic news, investors are hitting the sell button on top Indian stocks. NSE’s Nifty 50 index is down 7% from in the past six trading sessions. In Friday’s bloodbath on the Street, even popular stocks such as Bajaj Finance Ltd were trading 7% lower.
With the spread of the coronavirus showing no signs of stopping, investors are worried that a longer-term global economic slowdown is on the horizon.
Stretched equity valuations are exacerbating the fall. Major domestic and global markets were already trading at record levels and sky-high valuations only a month ago. The Nifty 50 soared to a price-earnings multiple of over 19 times on FY21 earnings, which is near its historical peaks, and quite worrisome. So any slowdown in the global markets will naturally see stocks getting re-priced at lower levels.
But the bigger issue now is how much the global economy will be hit, particularly if the virus is not contained. Europe is emerging as a hotspot for the disease while America has also reported an increase in the number of cases. Global equity research firm Jefferies warned that the “Large outbreaks of COVID-19 in South Korea, Italy, and Iran point to the risk of a global pandemic that, if not handled correctly, could swamp hospitals with acute cases." Jefferies further noted that “If not managed correctly, this could significantly rattle markets."
And it is. As infections rise across the global, travel and tourism and other related sectors will shrink. The spillover effects markets fear will impact airline stocks, hotels, travel and tourism, retailing across eastern countries, Europe and America.
Cyclicals are already reeling under a sell-off from the coronavirus as prices of major metals are down. Sectors such as pharmaceuticals and upstream oil and gas companies are also vulnerable to a slowdown as China now accounts for about 15% of the global economy, besides being a major supplier of raw material.
“A prolonged shutdown of manufacturing units in China will also limit the availability of key components for automobile OEMs as well as spare-parts in replacement markets, consumer durable companies (refrigerators, washing-machine, electrical appliances) and non-durables like adhesives, paints, etc," noted a recent Kotak Institutional Equities report.
As markets start to price in the economic cost of the virus, a further downside to the equity markets cannot be ruled out. Although India is not directly affected, a global risk-off mode means foreign investors will be shuffling their portfolios to safe havens such as US Treasuries and even gold. Hence, prolonged uncertainty in the equity market cannot be ruled out till such time the impact of the virus can be quantified.
However, markets could tend to regain their footing after 3-6 months past such epidemics, data from previous such episodes show. Of course, it all depends on how quickly the virus is contained.