Sell stocks and go! Difficult to predict when the market carnage will end

The coronavirus health scare caught the world off-guard and has completely roiled equity markets over the past few weeks. The precipitous fall in global equities since the first case came to light in late 2019 has already ended the bull-run in many stock indexes over the globe, including in Dow Jones Industrial Average (DJIA), which saw its 11-year bull-run punctured. Indian markets, too, succumbed and entered bear terrain, which is typically defined as a fall of 20 per cent or more in an index or a stock from the top.

The developments have made analysts wary, who say it is difficult to predict when the market carnage will end. Some even say any relief rally in the markets should be used to sell / exit positions.

“On the Coronavirus, by far the most important number investors need to monitor is not the details of the multiple easing policies announced over the past few days. Rather it is the rate of new infections. With GREED & fear’s initial downside target of 2,346 on the S&P500 having been almost reached, sharp countertrend rallies can happen at any time. But, in GREED & fear’s view, these would be rallies to sell,” explains Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors.

The reason a market rise would be a reason to sell, Wood says, is that the infection rates in the Western world, led by Europe, appear for now to be following more closely the trajectory rates seen in Wuhan rather than other Asian jurisdictions which have so far more successfully combatted the virus.

“The key area to watch for buying risk assets, in GREED & fear’s view, is any sign of the rate of infections peaking in Western Europe. This should happen first in Italy, though it has not happened yet. But Italy has been the Western world’s equivalent of Wuhan, namely a public health disaster. But for now GREED & fear would advise investors to track closely the numbers in three countries, namely France, Germany and Switzerland,” Wood wrote.

Most leading brokerages – domestic and foreign – are already sounding cautious as regards the economic impact, and see the world economy heading into a recession – perhaps the worst since 2001. The market meltdown, analysts say is reviving the spectre of the global financial crisis (GFC) when the notion of safe asset shrank dramatically, and equities, gold, and treasuries can sold-off in tandem. What compounds the problems for India this time around, however, is the already fragile economy which has been hit hard by the Covid-19 pandemic.

“Financial markets will go through a period of heightened nervousness that could continue for several weeks or even months. During that period, we expect further drawdowns, but also rebounds, for instance should monetary or fiscal policy measures be announced to offset the economic impact. What is important for the longer-term orientation of portfolios is that we think that the global economy will face a slowdown but will be able to weather this blow,” cautions Michael Strobaek, global chief investment officer at Credit Suisse.