Sensex, Nifty stuck in coronavirus storm; should investors expect profit in 2020?

It seems investors are sitting on boundaries in a wait-and-watch mode and traders are reaping gains from the volatility cycle in which the benchmark indices are stuck.

Sensex and Nifty which were seen hitting record levels in first half of this year have turned volatile with investors struggling to keep their portfolios afloat. Sensex which closed at 41,253 on December 31, 2019 was seen climbing to 45,000 by June 2020, according to Morgan Stanley.

"Corporate tax cuts create room for improved earnings growth, so we raise earnings growth estimates for Sensex to 25% in FY20 and 23% in FY21," said the foreign brokerage firm in 2019.

For Nifty 50 index, Goldman Sachs raised target to 13,000 from 12,500 earlier, JP Morgan revised it upwards to 12,200, while Nomura raised the March 2020 target to 12,545. Sensex extended gains into new year but could manage to rally for just nearly a month.

On  January 20, 2020, the index hit  all-time high of 42,273 following gains in global peers. Solid US economic data and fresh liquidity infusion from the Federal Reserve helped the sentiments on Dalal Street. Nifty too scaled a record high of 12,430 during the same session.

The rally in 30-stock index slowly fizzled out by February 1 when FM Nirmala Sitharaman presented Union Budget in Lok Sabha. The volatility in market ahead of uncertainty in Budget was followed by a decline in the benchmark indices on February 1 after the financial presentation fell short of expectations.

While  Sensex closed 988 points lower to 39,735, Nifty plunged 300.25 points or 2.51 per cent to 11,661.85 on the Budget day.  

Sensex fell 1,275 points intra day from the day's high of 40,905 in the same session.

Any hopes of hitting the 45K target in June 2020 were further dented by rising number of coronavirus cases across the world which hit sentiments in domestic market.

After a brief rally of 660 points till February 12 to 41,565, Sensex tumbled like pack of cards to 25,981 in nearly 1.5 months.

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On March 23, the index closed at 25,981, losing 37.5% since February 12. The benchmark indices logged their worst-ever loss in single session. While Sensex lost 3,934 points to 25,981 , Nifty closed 1,135 points lower at 7,610.

Sensex and Nifty crashed after the number of infected cases from coronavirus zoomed to 415 in the country. The government imposing lockdown in 75 districts to mitigate the threat of rising coronavirus cases also weakened market sentiment.

Since then, the indices have attempted recovery but have been hit by high volatility. Sensex gained 7,736 points or 29.77% to 33,717 on April 30, 2020.

However, the index was affected by rising number of cases across the world and at home which pulled it back to 30,028 on May 18.

It seems investors are sitting on boundaries in a wait-and-watch mode and traders are reaping gains from the volatility cycle in which the benchmark indices are stuck.

With a vaccine to treat coronavirus still months or years away, the global economy has plunged into worst recession since 1930. India too is projected to log negative growth this year as coronavirus lockdown has stalled economic activity across the country.

De-growth in the economy will take a toll on Sensex and Nifty which has worried investors who were anticipating huge gains in market in beginning of this year.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said, "Since the start of this year, we have seen our GDP estimates for FY21 going down from +5.5% to -2.8% as of now. Similarly, our Nifty 50 EPS estimates for FY21 have got revised down by 25%. We are heading for a global recession with CY20 being a washout and a smart recovery coming in CY21.

The impact in India would be higher compared to other economies as we went for a nationwide lockdown and now we are gradually opening parts of the economy. We would face the dual impact of a slow recovery in demand and some constraint on the production side due to labour shortage. This would have a meaningful impact on earnings and we could see further earnings downgrades post Q1-FY21 earnings season. Sensex/Nifty-50 could remain under a bearish phase for quite some time in this calendar year due to cut in earnings estimates and subsequent higher valuations."

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Apart from Coronavirus, there are a host of other factors which will affect movement of Sensex and Nifty this year.

"The progress of trade war between US and China and global trade will have a bearing on global GDP. Beyond earnings, few other factors that will decide the movement of Sensex/Nifty would be pace of demand recovery, FII and FDI flows, further measures that will be taken by the government and RBI and path of global markets. We also need to monitor the threat of a relapse or second wave of Covid-19 in the coming winter season. If there is no second wave then the path of a smart recovery in FY22 will drive markets next year," Oza added.  

On the outlook of market this year, Oza said, "We could remain in a bear phase for a slightly longer time due to the uncertainties surrounding banking system. As BFSI sector accounts for 35% in Nifty 50, their recovery path is very crucial for markets to go up. We still don't know the full impact on earnings of corporate India as Q1 results will only come in July-August 2020. Investors accumulating stocks or investing in equities need to have more than one year's time frame for making money. Investing based on FY22E will bear fruit and 2021 could be the year when good returns could come in."

Volatility would be part and parcel of Indian market this year, say analysts. Discovery of an effective Covid vaccine will also decide the direction of benchmark indices in 2020.

Hemang Jani, Head, Retail Equity Strategist at Motilal Oswal said, "The market is likely to be volatile this year as there is no major reason for its upmove. Even the relief measures announced by the government have not been able to boost sentiments as the government has its own limitations in providing major liquidity support to economy. Further, there is uncertainty on lockdown relaxation and pick up in the economic activity. The earnings season and the management commentaries so far also suggest more volatility and disruption in earnings ahead.

On the back of two months of lockdown due to Covid-19, earnings have seen a sharp 30% downward revision. We expect the market direction to depend upon the spread and intensity of COVID cases, development around Covid vaccine and incremental government/ regulatory actions to restart the economy. Investors would also track how soon the economy is able to get back to normal and the situation on the banking NPLs, moratoriums front."

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Jani recommends defensive approach to portfolio construction with preference for telecom, pharma and select consumer and auto stocks. Investors can benefit from these themes which are playing out well currently and it's crucial to build a portfolio around these themes for 2-3 years to create wealth.

Apart from coronavirus cases and US-China tension, other factors which will dictate movement of Sensex and Nifty are monsoon, stress in the financial sector and direction of interest rates. They will play a crucial role in ensuring recovery of the weak Indian economy.

Deepak Jasani, Head of Retail Research at HDFC Securities said, "For the next two months, markets would be concerned about how much and till how long will the growth and earnings be impacted due to Covid-19. Later once and if we have Covid-19 coming under control, we could then go back to our spreadsheets, try and project estimates and then the markets could form a base and start to trend upwards.

Monsoon intensity and spread, the extent and spread of stress in the financial sector and the real sector, the trajectory of Rupee and interest rates and the view of rating agencies on sovereign rating are some other factors that will decide the movement of indices in 2020."

Pankaj Pandey, Head of Research, ICICI Direct is structurally positive on the Indian economy and equity market over the medium-to-long term horizon.

"While economic recovery could be U shaped, we remain a firm believer of the fact that market, being a leading indicator, is more likely to witness V-shaped recovery.  However, market it yet to gain clarity on extent of the economic damage both in terms of time as well as quantum. Moreover, as economic data points get known, further clarity should emerge on economic dislocation. This is what is reflected in the market weakness, as seen now. We expect the volatility to continue keeping the market in a nervous mode for the time being."

The downfall in economic activity during last two months has forced analysts to downgrade earnings estimates.

"In terms of earnings, we have downgraded our earnings estimates for Nifty to the tune of 18% for FY21E and 13% for FY22E. Incorporating the downward revision, we now expect Nifty earnings to grow at a CAGR of 13.2% over FY19-22E against expectation of 18.2% CAGR in the past. We, however, do expect further downward revision in earnings, given the extended lockdown and its impact," Pandey said.  

On expectations of earning profit through equities this year, Pandey said, "Bottom up approach can always lead to long term wealth generation and it's not different in 2020. We advise investors to position their portfolio from a long-term perspective through companies with excellent and reliable performance over the years, based on the established business models, strong balance sheets, and quality management."