Stock markets and Omicron: why investors don’t need to panic yet

At a time when the third wave of Covid-19 has spread rapidly and several states have restrictions imposed, the stock markets remained largely unaffected. As the number of active Covid cases fell from less than 10,000 on December 28 to around 90,000 on Wednesday, the benchmark Sensex jumped more than 2,400 points, or 4.2%, from 57,794 on December 30 to close at 60 223 Wednesday. However, markets registered a 1% correction on Thursday, in line with global markets, after the minutes of the meeting of the United States Federal Open Market Committee held on December 14 and 15 indicated a more hawkish monetary policy.

Who invested?

While domestic institutional investors have remained strong bulls over the past six weeks, with foreign portfolio investors being net sellers, the recent recovery has been supported by an influx of REITs. Data from National Securities Depository Limited shows that in the past three trading sessions, REITs have invested a net amount of Rs 4,306 crore, compared to the net of over Rs 40,000 crore they have withdrawn. since November 22, 2021, amid indications that the U.S. Federal Reserve will tighten monetary policy.

Market participants say that the fact that the Reserve Bank of India can now postpone any plans to raise interest rates in India has provided another boost to the market.

Investors are also reassured that the Omicron, while being a fast-spreading variant, causes less serious illness, and that state governments might not opt ​​for tough shutdowns that would hurt economic activity too much.

“Dow Jones sets a new all-time high when the daily number of Omicron cases surpassed one million in the United States may sound like a paradox, but it is a clear message from the market that the rapidly spreading and less virulent variant of the virus marks the beginning of the end of the pandemic. In addition, most countries do not impose new restrictions that impact economic activity, ”said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

What are the concerns?

As we saw on Thursday, markets are expected to experience bouts of volatility due to concerns about inflation, rising interest rates and increasing cases of Covid. The minutes of the meeting released by the Fed on Wednesday indicated that it may not only raise interest rates sooner than expected, but also reduce its holdings of assets to control inflation.

The Dow Jones index fell 1.07% on Wednesday and the Nasdaq fell 3.3%. Following this, the Nikkei in Japan also fell sharply by 2.9%, and the Sensex by 1% cent (621 points) to close at 59,601.84 on Thursday.

Some fear that an earlier-than-expected rise in interest rates in the United States could result in a larger outflow of REIT funds, leading to a correction in emerging economies. It would also lead to a movement of funds from equities to debt securities which would lead to weakness in equities.

At the same time, if states impose lockdowns, the economy, which has experienced a fragile recovery, could be hit. Meanwhile, investors are also awaiting reports from the corporate sector on third quarter earnings. Market participants say all of these factors could keep the market volatile over the next two to three weeks.

Traders in the CST zone in Mumbai. (Special photo: Ganesh Shirsekar)

Will the impact be different from what we saw in the previous wave?

Before hitting the panic button, investors need to look back and see how the markets traded during the second wave of Covid. Between March 10 and May 6, 2021, when active cases in India rose from around 20,000 to over 4.1 lakh, the Sensex rose from 51,279 to 48,253, or 5.9%. However, as the number of cases declined over the next month, the Sensex quickly recovered to a new high of over 52,000 in June. It increased further and reached an all-time high of over 62,000.

The question now for the market is: how far will Omicron hit the economy? “The economic impact should be less profound than that of the second wave, building on past / international experience. Our baseline scenario for GDP forecasts incorporates downside risks. Slower policy normalization (by the RBI) is likely to be accompanied by a gradual reduction in budget deficits, ”said Radhika Rao, senior economist, DBS Bank.

What should you do

If REITs remain buyers and domestic institutions continue to support the market, major stock indexes should continue to advance. Retail investors and mutual funds are expected to pump more money into the market, as in 2021; they’ve had a continuous flow of retail money through systematic investment plans. In addition, the financial system is still overflowing with liquidity. The Union budget in February and the RBI’s decision at the next political meeting will give new direction to the markets.

While markets may remain volatile over the next two to three weeks, depending on how quickly Covid is spreading, experts stress that investors should not panic. Fund managers say that while investors shouldn’t take excessive risk in lesser-known companies and in small-cap and new-generation companies, they should rebalance their portfolios appropriately. One fund manager said that if an investor is overweight equities then they need to shift some funds to hybrid funds. However, if an investor is underweight in equities, they may continue to invest in equities and look to invest in flexicap funds to gain diversified exposure.

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