COVID-19: Tale of two stock markets

A lot has been said about the resilience of China’s stock market in the recent havoc. Here is my view and understanding of the situation. Presenting you a story of the tree that bears fruit will be stoned.

China’s stock market rallied almost 36 per cent from the low of 2016 to the high of 2018. Post that, Chinese market witnessed two severe falls of 32 per cent and 16 per cent, respectively. However, if we look at Indian stock market, domestic markets had rallied almost 82 per cent from 2016 low to an all-time high seen on January 2020 while, the staggering upmove was not in a straight line. It had witnessed some turbulence on the way up in the form of correction, which were anywhere between the range of 11-15 per cent. Indian markets were trading at premium valuations and despite weak macro data, the markets were scaling to new heights as the stock markets are forward-looking, always trying to find clues about what the economic future holds. Also, we see that Nifty was rising while remaining completely devoid of internal strength.

However, all of a sudden, this virus thing emerged and no doubt, the viruses have always been a scary nightmare for the stock markets. This situation reminds me of a famous quote of Warren Buffett “Only when the tide goes out do you discover who’s been swimming naked”.  With the outbreak of Coronavirus, a big question mark was put over the future earnings of many companies and also, on the economy, which was gradually picking up its pace, certainly created panic.

Whereas, if we look at Chinese markets which was already gripped with issues like trade war, before the outbreak of Coronavirus, it did not have plenty of juice to squeeze out as compared to Indian markets. Hence, Chinese markets were somber on future expectations while, Indian markets that was mounting on expectations in the blink of an eye had seen its growth pillar being crumbled and further; the most cherished stocks, i.e. ‘consumer centric stocks’ witnessed its revenue visibility turn blurry overnight. This has led to a panic-like situation in the pricey-valued markets. In simple terms, uncertainty clouds the path forward. As John Hayden has quoted, “The reason that prices move is because of how traders perceive the reality of the market place in a certain time.”

Also, if we look at some technical evidences, Nifty was rising over the past two to three quarters while, remaining completely devoid of internal strength. This was evident from the fact that every incremental high that Nifty made has come with a divergence on the lead indicators; this means that any incremental high was not being confirmed by the lead indicators. With this piece of technical evidence, a correction was quite likely but with the speed and quantum, by which we had seen correction, can solely be attributed to the outbreak of Coronavirus.