The Delhi government has imposed night curfew to check a surge in Covid cases, but said it was not considering lockdown.
The Nifty50 and BSE Sensex index are down over 2 per cent this week while the fear gauge India VIX has soared some 12 per cent. Investors are fearful that other states may also slap more restrictions, which may leave the blue sky valuations of Indian equity market vulnerable to a reality check.
“I am not worried…this is something that can be a short-term thing,” said Dhananjay Sinha, director and head of institutional research at Systematix Group.
Sinha believes in the short term rising COVID-19 cases will accentuate the relative underperformance of Indian equities to developed markets such as the US, where rapid vaccinations are inducing some of the best growth estimates the country has seen in decades.
On Friday, Christopher Woods of Jefferies slashed the weight of Indian equities in his portfolio by 200 basis points as he believes that the country’s market is not prepared to digest another series of lockdowns.
Last week, brokerage firm JPMorgan suggested that continuous rise in cases will leave the government with no option but to bring back a national lockdown in some form, especially, as hospital capacity deteriorates.
“The obvious trigger has to be new variants. Cases are now not so far off the previous peak registered in September 2020 but the rate of increase is steeper suggesting the arrival of the more infectious new variants,” said Christopher Woods in his latest GREED & fear report.
The return of state-wide lockdowns poses risk to the market’s assumption of a clear runway for economic and earnings growth. Investors entered the new financial year with the assumption that the economy will grow at north of 10 per cent and corporate earnings by more than 30 per cent.
While both the Centre and state governments remain hesitant of imposing complete lockdown, the solution lies in the acceleration of the country’s vaccination program.
“At the current pace, we estimate India is on track to vaccinate 40-45% of its population by end-2021, above the forecast of 30% we made in our 2021 outlook report. This faster pace of vaccination is arguably a more effective way to deal with the second wave than strict lockdowns,” Sonal Verma and Aurodeep Nandi of Nomura Securities said in their latest note.
Sinha says equities are still gaining traction among investors despite the near-term threat of lockdowns and likely reversal of capital flows towards developed markets. While there has been weakness in the domestic stock market in recent weeks, the benchmarks are yet to enter the correction zone, which is defined as a 10 per cent fall from the recent high.
On the technical front, analysts believe Nifty50 may have formed a top for the near-term and see gradual correction towards 14,250 points.
“We are not expecting a sharp breakdown in the market but I will not chase the dips and look to trim positions at every rally towards 14800 in the very short term,” said Navneet Daga of YES Securities.
That said, Ajay Srivastava, of Dimensions Corporate Finance says long-term investors should use the current weakness to their advantage. “…in the next three to five years, the larger companies of this economy are going to make supernormal returns. That is the moral of the story,” he told ETNow.