Second COVID wave hits D-Street: Should investors buy the dip or cash out?

Market Outlook
(Image: Reuters)

(Image: Reuters)

The Indian market remained volatile in March and has dropped by about 5 per cent from its respective highs, but experts feel that investors have nothing to worry as India’s long-term story is still intact and dips can be used to get into quality stocks.

India saw 46,951 new Coronavirus infections being reported in a day, the highest so far this year, taking the nationwide COVID-19 tally to 1,16,46,081, according to the Union Health Ministry data, updated on Monday.

Recent data suggests that there is a sudden rise in COVID cases across India, possibly hinting at a second wave. Rising cases also mean the possibility of further lockdowns and a delay in economic recovery.

“Market sentiments are dented as there is a major dampener in the form of fast-rising COVID-19 cases, especially in some economically strong states like Maharashtra. Restricted economic activity in these regions may impact the optimistic growth projections for FY22,” Gaurav Garg, Head of Research, CapitalVia Global Research, told Moneycontrol.

“In the medium term, the market may see some volatility due to the rising cases, globally. Lockdowns in some regions may also hamper market sentiments,” he said.

The Nomura India Business Resumption Index (NIBRI) dipped to 95.1 for the week of March 21 from 95.4 the previous week (previous: 95.7), 4.9pp below the pre-pandemic normal.

The pandemic’s second wave is now spreading to states outside Maharashtra and is starting to impact mobility. The knock-on effect of the second wave on mobility suggests a likely sequential dip in contact-based services and a near-term delay of normalisation, said the Nomura report.

The global investment bank expects the impact to be more transitory and muted. Medium-term tailwinds from the lagged impact of easy financial conditions, fiscal activism, strong global growth, and continuing vaccine momentum should support real GDP growth of 13.5 per cent year-on-year (YoY) in FY22, up from -7.4 per cent in FY21.

Apart from rising COVID cases at home, investors across the globe are also worried about elevated US Treasury Yield levels that could be a short-term negative. However, experts see this as a near-term negative and dips could be used to buy.

The US 10-year Treasury note yield rose to its highest in 14 months after the US central bank sees the economic growth of 6.5 per cent this year, which would be the largest annual jump in gross domestic product since 1984. The rate of inflation is expected to surpass the Fed’s 2 per cent target to 2.4 per cent this year.

“Long-term analysis has proven that, at a 2-3 per cent inflation level, equities provide positive real returns, whereas if the inflation level is higher than 3 per cent, equities may not offer positive real returns,” Palka Chopra, Senior Vice President, Master Capital Services, told Moneycontrol.

“Profitability of corporates deflate when the cost of funds rise, which also leads to their interest-servicing capacity to deplete. That is why a rise in interest rates is considered to be the worst enemy of equity markets,” added Chopra.

Treasury bonds are considered to be the safest investment and investors generally invest in them during times of economic recession. When the economy shows signs of recovery, investors shift their focus towards risky assets. This triggers a selloff in bonds.

“The market will see challenges in bond yields, and till they spike, the markets will be jittery but yields will settle as they do. Also, the absolute level of yields, once they settle, is not alarming, which means global allocation to emerging markets and India will continue,” Naveen Kulkarni, Chief Investment Officer, Axis Securities, told Moneycontrol.

“We believe that the market will face challenges for some time, say till the end of March, but next month onwards, the uptrend will resume. So, these are decent levels to accumulate good quality stocks,” he said.

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