Weak economic data, coronavirus spook investors

Both indices are down nearly 9 per cent from their all-time highs in mid-January. A sharp reversal seems difficult this time as the peak impact of the virus is yet to play out.

There seems to be little respite in sight for the markets - which have just seen their worst week in a decade - as the impact of coronavirus has started reflecting in economic data.

Factory activity in China, the global engine of growth, has contracted at the fastest pace on record with China’s official Purchasing Managers’ Index (PMI) falling to a fresh low of 35.7 in February against 50 in January.

Further, China and South Korea continued to report more coronavirus cases over the weekend, while  the US, Australia, and Thailand reported their first cases of death.

“It’s going to be a tough period,” said Shankar Sharma, founder and vice-chairman of First Global.

“Coronavirus is a serious problem and can lop off quite a bit from global growth.”

The Sensex and Nifty crashed nearly 4 per cent on Friday - the biggest single-day fall since 2015 - to end at 38,297 and 11,202, respectively.

Both indices are down nearly 9 per cent from their all-time highs in mid-January.

On previous occasions, indices have rebounded sharply after a near-10 per cent drop.

However, a sharp reversal seems difficult this time as the peak impact of the virus is yet to play out.

The India VIX surged 31 per cent on Friday, a sign that traders expect the markets - which are back to October levels - to remain highly volatile.

Further, most global indices have entered “correction zone”, posting a 10 per cent decline from recent highs.

Many don’t rule out a “bear market” - a fall of 20 per cent from highs - if the World Health Organization’s (WHO) warning of a global pandemic comes true.

The US markets fell 4 per cent in intra-day trade on Friday, before paring losses to end 1.4 per cent lower.

In addition, the US 10-year Treasury hit a record low of 1.114 per cent, before settling at 1.163 per cent.

Market players say such low reading on the 10-year Treasury is a sign of extreme anxiety.

Foreign portfolio investors (FPIs) pulled out close to Rs 12,000 crore last week.

Domestic investors pumped in an even higher amount, but it did little to stem the fall in share prices.

Sharma said overseas investors typically “chase momentum” and there isn’t much predictability to their flows.

As regards a recovery, market players have not ruled out a bounce-back on account of technical factors such as short-covering.

“Historically, global events that have caused a meltdown in markets have proved lucrative investment opportunities.

"The key point to remember is that we do not know for how long the current crisis may play out.

"Therefore, while investing in such times, it is better to make staggered investments,” said S Naren, executive director and chief investment officer of ICICI Prudential AMC