Market outlook: Global ETF selling holds the answers

• Key high-frequency data is expected to be released early this week, which is expected to show a big downturn for the Chinese economy
• Markets though could continue to meander on the downside as positive triggers are missing

The spread of the corona virus outside of China remains a key risk for the markets in both domestic and global markets. Over 5000 cases of new coronavirus cases were reported outside China last week spooking global markets into its worst-ever weekly sell-off in many years. Intensive selling may ease, but the risk is not yet off the table as global equities were quite stiffly priced.

JP Morgan notes that markets were not set up for a massive global shock like the Covid-19 given where financial assets were priced coming into the year. But some shocks will be inevitable. The Chinese economy is expected to post its worst first quarter, which does not bode well for Asian countries that are dependent on China in both supply chains and tourism.

Key high-frequency data is expected to be released early this week, which is expected to show a big downturn for the Chinese economy. India’s PMI data, which showed a healthy growth last month coming in at 55.3 times, remains at risk, though some of the coronavirus related effects may be yet not be captured in this month’s data.

Markets though could continue to meander on the downside as positive triggers are missing. The third-quarter results were mixed, while key macros sectors such as autos and housing continued to remain on the slow lane.

A quick resumption in the supply-chain becomes an important variable in the resumption of corporate growth. Autos continue to remain on weak grounds as the sector now braces for a virus-related slowdown.

Likewise, the pharma sector is also facing some headwinds on raw materials sourcing. To top it, domestic sales of pharma companies have shown signs of easing last month.

But metals are among the worst hit in the global economy as China remains a dominant metals player. A shutdown in China has sent metal prices correcting across the globe, and it does not seem like there is light at the end of the tunnel for this beleaguered sector any time soon.

To top it, some high-flying sectors such as consumption have been showing divergent growth trends within the sector.

All in all, there is nothing to cheer the market forward though. The Gross Domestic Product numbers released last week were not comforting, though it shows that growth remains elusive. But nevertheless, these numbers reflect the state of the economy much before the virus became a larger threat.

So this may well, be a slow, downward grinding market for now, though the worst seems to be over. Some larger-cap names have been hit harder as foreign investors have pulled out large sums of money from the markets. Small and mid-caps have not been roiled in this market just yet, as some of these segments are just beginning to see domestic inflows.

So, it remains a mixed outlook in terms of which sectors could be further roiled due to the volatility. Global ETF selling remains a key risk, particularly for the large-caps.