Explained: Covid-19 cases are rising, and so are the markets. What is going on?

Equity investments started the year well despite concerns over the Omicron spike which again led to mobility restrictions, hit contact-intensive services and threatened to slow the pace of economic recovery.

The third wave, which saw nearly 2.5 lakh infections in the country on Wednesday, coincided with the US Federal Reserve’s decision hasten the withdrawal of the raise, and indications that interest rates could rise sooner than expected. But these factors, along with rising domestic retail price inflation, have not deterred Indian equity markets.

How much did the market earn?

The BSE-based Sensex benchmark traded in a narrow range in the final month of the latest calendar and closed at 58,253 on December 31. Over the nine trading sessions of this calendar, the index is up 2,982 points or 5.1% — on Thursday it closed at its highest level since Oct. 26, 2021. Thursday’s close (61,235) is only 530 points or 0.85% lower than the all-time high close of 61,765, observed on October 18, 2021. Although the services sector, including travel, tourism, and l hotel industry have been affected by the Omicron wave and demand is expected to be under pressure in many other sectors, including FMCG, the market remains buoyant.

Why do markets go up?

Markets rose as selling pressure from foreign portfolio investors (REITs) eased and buyers entered the scene, and domestic equity inflows continued.

The REITs, which sold shares with a net worth of Rs 38,521 crore on the stock markets between October and December 2021, have so far invested a net amount of Rs 3,227 crore in January.

On the other hand, domestic institutional investors, who invested Rs 31,231 crore in December, have invested a net amount of Rs 5,485 crore in January so far.

Retail investors and mutual funds were in buying mode, with the latter receiving investor money amounting to Rs 25,000 crore in December.

The market has already taken into account The Fed’s tightening plan, and hopes that the Reserve Bank of India will continue its accommodative monetary policy in response to the need to support the economy.

While Omicron remains a threat and cases continue to rise across the country, market participants believe that the less virulent variant does not challenge the healthcare infrastructure at this time and is not expected to significantly harm to the economy.

Is this how the markets also behaved during the Delta surge?

During the period between March 10 and May 6, 2021, when active cases in India rose from around 20,000 to over 4.1 lakh, the Sensex fell by 5.9% from 51 279 (March 10) to 48,253 (May 4). However, as cases dwindled over the following month, the Sensex quickly recovered to reach a new high of over 52,000 in June. Over the following months, it rose further and reached its all-time high of over 62,000 in October.

What are the risks ahead?

If the Fed tightens too quickly, outflows from the REIT could follow, impacting the domestic market and the rupee. Investors are also awaiting third-quarter earnings reports from the corporate sector. A possible increase in hospitalizations and deaths over the next two weeks could hurt sentiment and impact the economic recovery. Markets are also eagerly awaiting the Union budget in February and RBI policy for clues.

“Having realized that even their relentless selling (REITs) has not driven the markets down, as they may have expected, REITs are now on the back foot. Seizing the opportunity, exuberant retail investors aided by fund-laden DIIs are driving markets higher, said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

According to Vijayakumar, there is both a positive and a negative dimension in this rally. “The positive is that high-quality large-cap stocks are leading the rally. The negative is that many lower-quality stocks that don’t warrant any investment are also rising,” he said.

Will the rally continue?

Even if markets rise, concerns about valuations remain and to that extent, if earnings growth is not strong, the recovery could hit a bottleneck.

A report by UBS economist Tanvi Gupta Jain raised this concern. “Despite our expectations of double-digit earnings growth in FY23/24, we believe the rise in equities is capped by lofty valuations,” he said.

Although REIT flows have fueled the recovery over the past 18 months, they may not support equity markets in the same way in the future due to Fed decisions to withdraw stimulus and raise rates. of interest.

Another constraint to the recovery could come from a faster-than-expected shift to policy normalization while inflation remains at elevated levels. It is possible that even RBI could raise interest rates in the second half of this schedule.

On the other hand, support for equities could come from a surge in government-led infrastructure and investment, increased FDI in manufacturing, and a boost in production-related incentives in the manufacturing sector.

Investors need to temper their expectations of stock markets, experts say. However, they believe equities could continue to outperform other asset classes this year as well. Investors underweight equities should therefore continue to invest in them.

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