According to the brokerage, if there are fresh rate cuts or infusion of liquidity by global central banks then FII flows could resume into select emerging markets as and when the covid-19 virus impact fades out.
The increasing cases of novel coronavirus outside of China have worried investors/traders, as a result there was a knee-jerk reaction in the equity markets globally.
India was also caught in the virus trap with Sensex falling more than 7 percent in the last 8 out of 9 sessions and shedding nearly 9 percent from its record high in January this year.
"We expect market to remain weak till the time the number of cases reported globally either stabilize or go down. Based on past behaviour, the recovery in market (post containment of such epidemics) is equal or higher than the fall. However, going by the speed at which the Covid-19 virus is spreading in most countries, it will be a while before we hit the bottom," Kotak Securities.
Worldwide, there have been more than 93,000 infected cases from virus with more than 3,000 deaths. China, Italy and South Korea are the worst affected.
Meanwhile, India reported 28 cases on March 4, sharply higher from 6 earlier which led volatility in the market yesterday.
But market losses were capped after central banks across the world took coordinated measures to boost the global economy.
Federal Reserve and Reserve Bank of Australia cut interest rate by 50bps each, while there are hopes that European Central Bank and Bank of England are expected to take policy action soon.
"With downside risk to global growth we can expect unconventional measures from governments and central banks across the globe. To address the near-term headwinds due to Covid-19 virus and potential slowdown in FY21 GDP numbers, we can expect some measures from the Indian government and RBI in the coming times," Kotak Securities said.
According to the brokerage, if there are fresh rate cuts or infusion of liquidity by global central banks then FII flows could resume into select emerging markets as and when the covid-19 virus impact fades out.
For India, SIP flows could act as a buffer for the time when FIIs withdraw their investments, it feels.
The market has been worried about consistent FII outflow since the cases started rising outside of China. FIIs pulled out nearly Rs 16,000 crore from India in last seven consecutive sessions till March 3.
Based on valuations, the brokerage largely expects the Nifty-50 to take support anywhere between 10,500 and 11,000, while it sees the index around 13,000-13,500 by the beginning of March next year.
"We need to keep in mind that Nifty50 has already corrected by 10 percent from its peak. On a conservative basis, downside of 10,500 and upside of 13,000 provides potential downside of 6 percent and potential upside of 16 percent. The risk-reward ratio of downside to upside at 1:3 has turned favourable," it said.
Considering the current scenario and valuations, it is ideal to accumulate stocks from current levels since risk-reward ratio is in favour of equities, it feels. "The lower bond yields will support higher valuations for equities, which is big factor in favour of equities."
The broader markets also corrected sharply in line with frontliners, but their recovery from henceforth is largely dependent upon Nifty50, Kotak feels.
In the mid and smallcap space, the brokerage recommended investors to look for companies with good earnings growth prospect and which are available at beaten down prices with reasonable valuations.
On earnings front, Kotak expects net profit of the Nifty-50 companies to grow 10 percent in FY20.
"We note that the strong growth in net profits of banks will be offset by sharp declines in net profits of the global commodity sectors, hurt by weak global prices in Q4FY20 due to the ongoing COVID-19 issue," the brokerage said.
After Q3FY20 earnings season, Kotak expects net profits to bounce 26 percent in FY21 driven by higher profits of (1) banks due to lower loan-loss provisions, (2) metals companies due to normalization in prices and profitability and (3) telecom sector due to higher ARPUs, as companies align prices with costs after a period of aggressive price competition.
However, considering the recent negative developments of Covid-19 virus and lower GDP growth estimates, earnings downgrades could continue in the next few quarters, it said. "There is downside risk to many sectors either on the realization front or availability of raw materials or increase in raw material prices. These will get factored into earnings as we go into fiscal FY21."
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