Volatility rules the market     

Taking positive cues from the global markets, the S&P BSE Sensex jumped over 389 points and the Nifty 50 gained 111 points in early trade on Wednesday. However, significant selling pressure coupled with weaker domestic sentiments saw the gains on the benchmark indices fading within the first two hours of trade.

While the Sensex jumped to day’s high of 39,435.8 – about 1% higher than the previous day’s close of 39,046.34, Nifty50 also swung nearly 1% to day’s high of 11,802.5. But changed sentiments led to over 554 points fall in the Sensex to the day’s low of 38,881.05, while Nifty fell 177 points to touch the day’s low of 11,625.1.

The Sensex erased some of its losses to close up 66.40 points at 39,112.74, while the Nifty 50 closed nearly flat at 11691.45.

The underperformance was not restricted to bigger companies, but was broad-based as the S&P BSE MidCap and S&P BSE SmallCap closed in the negative, after volatile trading through the day. While the MidCap index closed lower by 99.85 points at 14,542.9, the SmallCap registered a 193.67 points fall from the previous day’s close of 13,919.11 points. In the interim, the gap between the indices’ high and low points of the day were over 268 and 302 points each.

Among companies, the ones that have been seeing trouble lately took the maximum bashing. Jet Airways, where bankers opted to take the company through bankruptcy proceedings, touched its 52-week low of ₹29.05 – a 28.18% fall from the previous day’s close of ₹40.45. At the close of trade, the share prices closed 18.17% lower at ₹33.10. Housing finance major Indiabulls Housing Finance, whose subsidiary Indiabulls Real Estate touched its 20% lower circuit, also fell to a 52-week low of ₹500.2 on Wednesday, a 17.96% fall from its previous day close of ₹609.7, only to close ₹54.3 or 8.91% lower at ₹555.4.

According to Umesh Mehta, head of research at Mumbai-based Samco Securities, signs of capitulation in the Indian markets are visible today with across the board selling in high-debt balance sheets. According to Mehta, the case of the market was similar to traders in derivative segments wherein huge leverage hampers trading profits. “Similarly, leveraged corporates are facing the same reality,” says Mehta. Mehta also believes that in the past such capitulation has signalled the end of bearish tendencies in the market. “Nifty although may not reflect such a cycle, but small and mid-cap indices are revealing a clearer picture,” Mehta adds.

But, market experts suggest a caution. “Going forward, we maintain our cautious stance on the Indian markets,” says Jayant Manglik, president, retail distribution at Religare Broking.

Manglik says that the near-term market movement is likely to be driven by the progress of the monsoon, which has been delayed, as well as global indicators like the U.S. Federal Open Market Committee meet. “While, the recent developments between U.S.-China have been positive for global markets, the recent retaliatory tariff by India could escalate trade war tensions between U.S. and India,” says Manglik. “This could induce volatility into Indian markets,” he adds.

Another big worry emanates from Mauritius government’s proposal to amend it rules pertaining to tax residency, which could affect offshore funds operating out of the tax haven. The recent announcement from the Mauritius government indicate that a company will not be considered tax resident if it is controlled outside Mauritius. If the proposals go through, offshore funds would not be able to enjoy the benefits of India – Mauritius tax treaties which offer lower taxation for such companies registered in the island nation.

With the Sensex and Nifty trading 17.49% and 16.86% above the 52-week lows of October 26 last year, some marginal correction in the indices may not have a cascading effect. However, the S&P BSE MidCap and SmallCap are just 6.68% and 6.26% above their respective 52-week lows of October 2018 and February 2019 each. It would not be unfair to say that the life-highs hit by the Sensex and Nifty50 in aftermath of the 2019 general elections outcome point at gains being restricted in select large-cap stocks only, while the larger market is still struggling to grow.