New Covid threat casts shadow over markets

Spooked by the discovery of a new coronavirus variant Omicron, nervousness over US Fed rate hike, fears that GoI may backtrack on reform agenda after the government's decision to repeal farm laws and sharp selling by FIIs due to overvaluation concerns; the domestic stock market posted one of the worst weekly performances over the recent past. The NSE Nifty plunged 738.35 points or 4.16 percent to 17,026.45, the lowest closing level since August 30 this year and the BSE Sensex was down 2,528.86 points or 4.24 percent at 57,107.15 points.

The broader markets also succumbed to selling pressure as the BSE Midcap and Smallcap indices fell 4.14 percent and 2.52 percent respectively. On expectations of sooner rate hikes from US Fed, FIIs have net sold more than Rs21,000 crore worth of shares in the week ended, taking the total monthly selling to over Rs31,000 crore in November. DIIs could not fully cover up the FIIs' selling quantum.

It is pertinent to observe that since March 2020 lows and till last week, the rally in the Indian markets had been the best globally. Observers of FII behaviour predict modest shift of funds from India to emerging market peers such as China, Brazil and Indonesia. Analysts fear that the new variant of coronavirus and its potential to resist vaccines may leave investors worried that it could put countries' health systems under stress again, lead to fresh lockdowns, and threaten the global economic recovery.

If the existing vaccines don't work, scenario is back to March 2020 again say market watchers. Further, it could put the central banks across the world considering tapering of bond purchases and raising interest rates in a fix. Investors across the globe dumped stocks in the realty and metal sectors, which have done well this year, stocks linked to travel and hospitality and moved to the relative safety of healthcare stocks. After a strong performance in last few months, Oil futures tumbled over 11 per cent to below $70 a barrel on worries the new strain will slow demand. The price of Bitcoin has dropped into bear territory, sliding eight per cent to less than $55,000.

Most other major cryptocurrencies are trading significantly lower. Precious metals traded higher with Gold leading the charge. Ahead of preparation for coming year's Union Budget, statement of Union Finance Minister Nirmala Sitharaman stressing on increasing the tax net for achieving

higher revenue collection to finance socio-economic schemes run by the Centre and state governments has raised fears of new tax proposals in coming budget. Near-term direction of the markets will be dictated by one and only one issue i.e. the news flow on Omicron.

IPO Bazaar: Sharp swings in the recently listed Paytm (One 97 Communications) showcased the mispricing and rampant speculation in IPO market. Latent View Analytics and Tarsons notched good gains on listing. However, experienced players say present valuations are stretched and indicate possible correction in coming days. Go Fashion, the owner of women's bottom-wear brand Go Colors, will make a debut on the bourses on November 30. The final issue price has been fixed at Rs 690 per share.

Coming week will see two interesting IPOs- Tega Industries, the second largest producer of polymer-based mill liners, and Rakesh Jhunjhunwala-backed Star Health and Allied Insurance Company. Reports indicate that VLCC Health Care Ltd, one of the largest home grown beauty and wellness companies in India, has received capital markets regulator Sebi's go ahead to float the initial public offering (IPO). One very important observation in most of the recent IPOs is the issue of equity is 'Offer for Sale' from promoters or early investors in those companies. Roughly 80 percent of the amount raised has been vide OFS. Retail investors pay little heed to this subtle nuance because for them the price at which shares are allotted on price discovery through the 100 percent book building exercise is the same. This is OFS riding piggyback on IPO. It is time for the government to rethink its extant IPO policy that is lapped up more by promoters rather than by companies. Promoters should not be allowed to ride piggyback on IPOs. They should instead enter the unchartered waters themselves without holding the IPO crutch.

Quote of the week: To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit

- Sir John Templeton

Therefore, the key to investment success has to lie in doing the opposite: in diverging from the crowd. Those who recognize the errors that others make can profit enormously through contrarianism.

F&O/ SECTOR WATCH

Mirroring the bloodbath in the cash market, derivatives segment witnessed aggressive short selling and position unwinding. NSE Nifty closed below its 100-day exponential moving average placed at 17,150 level. On options front, Maximum Call Open Interest (OI) was seen at 17,500 then 18,000 & 17,300 strikes, and Call writing was seen at 17,300 followed by 17,500 & 17,400 strikes, while Maximum Put OI was seen is at 17,000 then 16,800 & 16,500 strikes, and Put writing was seen at 17,000, followed by 16,800 & 16,300 strikes with Put unwinding at 17500, 17400 & 17300 strikes. The Implied Volatility (IV) of Calls closed at 13.40 per cent, while that for Put options closed at 14.80per cent. The Nifty VIX for the week closed at 16.66 per cent and is expected to remain volatile. PCR of OI for the week closed at 1.38.

The option data indicates that the Nifty could trade in a broader range of 16,500-17,500 levels in coming days. With volatility spiking above its multi-month high levels and signalling the dominance of bears in the market; savvy market players warn that repeat of March 2020 scenario is not ruled out. Stay 'light' in derivative positions. It is recommended that leveraged positions on either side should be avoided. A highly cautious and very selective approach is advised for the coming week. Coming week may see renewed interest in the traditionally defensive sectors like Pharma, FMCG, and consumption. After several weeks of underperformance, Pharma sector was back in limelight on the back of fresh concerns over the new variant of Covid. Buying interest was seen in the diagnostic counters also.

Use declines to buy Biocon, Sun Pharma, Metropolis and Laurus. With chip shortage issue still bugging the sector, auto sales for November month will be keenly watched in the coming week. Industry sources indicate some improvement in month-on-month volumes. Weakness likely in two wheeler companies Bajaj Auto and Hero Motocorp. Maruti Suzuki, Tata Motors, Eicher Motors, M&M and TVS Motors will be in focus. Stock futures looking good are Apollo Hospitals, Biocon, Cipla, Escorts, Gujarat Gas, Laurus Labs and Sun Pharma. Stock futures looking weak are Bandhan Bank, Delta Corp, Indian Hotels, LIC Hsg, M&M, PVR and Voltas.