Global worries on covid drive retail investors off Dalal Street

MUMBAI: The stock market tumbled over 2% on Monday mirroring global weakness as the rapid rise in Covid-19 cases in Europe revived fears of fresh curbs on people movement.

Mid- and smallcap shares - which outperformed in the past week - suffered bigger losses as the unexpected drop mid-way through the session triggered margin calls by brokers, forcing retail investors to cut exposure.

News reports said France, Germany, Italy, Spain and the UK had witnessed a renewed surge in Covid-19 cases over the weekend, causing European markets to decline almost 3% and Dow futures to drop nearly 720 points on Monday.

Last week, the WHO had termed the rising novel coronavirus cases in Europe a "very serious situation".

Mid, smallcaps bigger losers
A report that several global banks were involved in money laundering to the tune of $2 trillion between 1999 and 2017 despite being red-flagged also weighed on investor sentiment.

The Sensex ended down 811.68 points, or 2.1%, to close at 38,034. The Nifty fell 254 points, or 2.5%, to close at 11,250.55.

"The Indian markets were already on the edge after the strong rally. The weakness in global markets following news of large banks being involved in suspicious activity simply triggered the fall," said Shiv Diwan, co-head, Edelweiss Institutional Equities.

The BSE Midcap index declined 3.4% while the BSE SmallCap index fell 3.6%.

Institutional selling
Foreign portfolio investors and domestic institutions net sold shares worth Rs 540 crore and Rs 518 crore, respectively. Sharp market declines are usually driven by big selling by institutional investors. But the relatively moderate selling by these investors suggests the main sellers have been individual investors.

IndusInd Bank, Bharti Airtel, Tata Steel, ICICI Bank and Mahindra & Mahindra lost 5-9%. India VIX jumped 10.7% to 22.19.

Indian stock indices have gained almost 50% from their March lows driven by the massive stimuli rolled out by the developed world. The easing of restrictions on movement of people worldwide, including India, and efforts to revive economies have also helped sentiment. Analysts said the markets were overbought after the near-uninterrupted rally since late March.

"Market should technically go to 10,500-10,700 levels, but it will not go down in a hurry," said Piyush Garg, CIO, ICICI Securities. "We have seen a 500-point fall from the top, so the fall will be more gradual now."

HSBC said in a note last week that the risk-on rally in Indian markets appears to have run its course with market rallying 60% from its lows and valuations at pre-Covid levels.

"India's market rally of 60% since the March 23 low appears to be perplexing investors now in terms of whether economic reality and market performance are at a wide divergence with each other and whether market is ripe for imminent correction," said HSBC.

India's economy has contracted by 23.9% in the June quarter on account of the disruptions caused by the lockdown to contain Covid-19. But cases continue to rise in the country with the number of total Covid-positive individuals crossing 5.5 million.

"Post this sharp 'risk on' rally, which appears to have nearly run its course, we now adopt a more defensive stance overall," said HSBC.

'Sharp fall unlikely'
Edelweiss' Diwan said he does not see a sharp fall in the market, but added that a slight correction would be a good opportunity to buy technology, pharma, pockets of the consumer staples sector, and select midcaps.

Investors are watching sales trends of companies in the upcoming festive season to gauge consumer appetite, which is considered key for economic recovery.

"Most companies are pinning hopes on the festival season. And if that doesn't come through, earnings forecasts may be trimmed again," said Andrew Holland, CEO, Avendus Capital Alternate Strategies.