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Rising concerns over global recession: Markets can’t mask their fear

Investor wealth worth Rs 4.81 lakh crore was wiped out in a day.

ET Bureau|
Last Updated: Feb 29, 2020, 09.43 AM IST
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Brokers said these investors have been spooked by the uninterrupted foreign selling in the past one week.
Mumbai: Stocks plummeted on Friday, posting their biggest single-day fall in four and a half years over growing fears that the spreading Covid-19 outbreak would push the global economy into a recession. Key Indian indices posted their biggest weekly losses since the previous global financial crisis as stock markets from Tokyo to Toronto were whiplashed by waves of relentless selling.

Panic-stricken domestic rich investors joined foreign funds in dumping shares on Friday. Record purchases in a day by local institutional investors — mutual funds and insurers — failed to avert the freefall. Investor wealth worth Rs 4.81 lakh crore was wiped out in a day.

The Sensex fell 1,448.37 points, or 3.64 per cent, to close at 38,297.29 while the Nifty dropped 414.10 points, or 3.56 per cent, to 11,219.20. Both indices have fallen about 7 per cent this week — the biggest weekly decline since August 2009 — resulting in Rs 11.03 lakh crore erosion in investor wealth.

“We do not know how it will end because economic fundamentals continue to rule the markets.” The Volatility Index, or VIX, soared 28.75 per cent — the biggest single-day rise since September 2016 — to 22.87.

Finance minister Nirmala Sitharaman said at a Mumbai event on Friday that there was no need to panic. However, she added a note of caution. “We had very exhaustive consultation with the industry on the effect of coronavirus. Everyone said as of now (there is) no issue but if this situation continues of various economies will potentially be impacted because of the virus,” said Nilesh Shah, managing director, Kotak Mutual Fund. “In the near term, uncertainty will then there could be shortage of raw materials,” she said.

India, which has been relatively less impacted by the contagion, too could be impacted by the global disruption because of economic linkages. “India can’t be completely divergent from global markets and a fall in the global markets due to coronavirus will impact India too,” said Shiv Diwan, co-head, Edelweiss Institutional Equities. “The obvious dependence on China with respect to imports has been high for quite a few companies and that has also had an impact.”
sensex-graph

Kotak’s Shah thinks the outbreak could be an opportunity for India as local manufacturing could be boosted because of the supply chain disruptions. Global stocks, especially Wall Street, led the rout on Friday as has been the case for the entire week. Hong Kong’s Hang Seng fell 2.4 per cent, South Korea’s Kospi dropped 3.3 per cent, while Indonesia’s Jakarta Composite Index declined 1.5 per cent. European markets were also down 3-4 per cent at the time of going to press.

The S&P 500 fell more than 10 per cent in just six days till Thursday, the fastest correction on record, according to Bloomberg. The Dow ended Thursday down1,191points, the worst single-day point fall in its history.


Emergency measures

About $4.4 trillion of investor wealth was wiped off in Wall Street this week. Yields on the benchmark 10-year US bonds dropped to a fresh record low on Friday as investors moved from riskier assets to safer options. The yield slid to 1.15 per cent before pulling back to 1.2 per cent.

The Dow Jones was down 638 points, or 2.48 per cent, on Friday at the time of going to press after slumping more than 1,000 points during the session. The S&P 500 and Nasdaq were down 1.92 per cent and 1.13 per cent, respectively.

Brent crude declined almost 2 per cent to $51.16 a barrel as commodities suffered a massive rout on worries of sliding growth or recession.

The spreading Covid-19 outbreak outside China has raised the spectre of recession and forced countries into taking emergency measures. Japan has shut down Disneyland and schools while Germany quarantined about 1,000 people and Switzerland banned major public events including the Geneva Auto Show.

Bloomberg reports that downgrades to global growth are growing with money markets now factoring in three Federal Reserve cuts. Bank of America is forecasting the weakest global growth since the financial crisis.

A growing number of companies including Disney, Apple, British Airways, Microsoft and Qualcomm have warned about the impact of coronavirus on their businesses recently.

Though economists have not be able to measure the extent of the damage, there is a growing fear that eroding corporate profitability could result in a sharp downturn in some large economies.

“The overall evidence points to a more significant hit to economic activity in the near term: the risk of a deeper-V in Q1 and of the growth slowdown spilling into early Q2,” said Nomura’s economists Sonal Varma and Rebecca Wang.

Growth in China from where the coronavirus originated is expected to take a severe hit while global investors have begun betting on a recession in Germany and Japan.

At home, foreign investors toned down their selling on Friday, pulling Rs 1,428.74 crore out of shares as against the average daily outflow of Rs 2,240 crore in the last six days. They have sold Indian equities worth Rs 11,200 crore in the last five days.

But the dominant selling of Rs 4,782 crore on Friday was unexpectedly from individual investors, mainly high net worth individuals. Brokers said these investors have been spooked by the uninterrupted foreign selling in the past one week. These investors could have sold a portion of their long-term stock holdings with the midcap index dropping 3 per cent and the smallcap index declining 3.5 per cent on Friday.

“Investors have reduced equity allocation and are moving into gold and debt, while local funds would definitely get defensive,” said Diwan.

Domestic institutions pumped in Rs 7,621 crore on Friday, their highest single-day purchase ever — but that was too little to stop the decline. So far this week, buying by mutual funds and insurance companies have cushioned the fall in markets.

(What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

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