How would rising Covid cases impact your equity investments?

By Palka Chopra, Senior Vice President, Master Capital Services

The Covid-19 pandemic is perhaps one of the most economically costly health emergencies in recent history. Its spread has severely impacted the global financial markets. Global equity markets, including Indian markets have rallied a lot since the last market crash. While the stock market was at its peak in February 2020, the sudden outbreak of pandemic triggered a freefall in share prices thereafter. But equity markets seem to be riding the second wave confidently, despite the economic activity in India having been derailed by the ongoing Covid-19 crisis. Market participants seem to be taking comfort from the government decision not to go for a full-scale lockdown, the vaccination to all adults, and hopes of things normalising in a couple of months.

The Financial Sector in India

The financial sector in India has undergone a massive evolution in the last decade. The developmental changes can be attributed to various components, new regulatory policies being one of them. Talking about the Indian economy, it has witnessed a notable turnaround in recent years, keeping aside the pandemic. Economic growth has rebounded, and the Government has initiated various reform measures to encourage investment and strengthen productivity.

Further, the last decade has been the decade of digitisation which has completely changed the face of the financial sector. Rise of fintech companies, mobile banking, cloud Banking. This new shift to digital compulsion will result in customers seeking the same in-branch experiences in their online interactions. In response to the slowing economic growth, the government has made a flurry of policy announcements which have given a major push to the country’s economic growth. There has been a strong commitment to game changing reforms, their successful execution, and the willingness of the private sector to take risks and invest.

The Surge in Covid Cases and Market Outlook

Now that Covid-19 cases are increasingly rising in the country, the investors and companies are apprehensive if the stock market will nose dive in 2021. The scenario has triggered worries of the situation that developed during early 2020 when nationwide lockdown had left the stock market bleeding with benchmark indices plummeting by huge margins.

There is a growing probability of complete lockdown in the country and investors fear another market crash. So as the situation worsens, what is the correct investment strategy for investors? There is increasing volatility in the market. However, a market crash like 2020’s is unlikely. The 2020 fall was a knee jerk reaction and now the present market has already discounted and improvement is expected in the coming period. Manufacturing activity and IT spending have gathered pace.

Buy low, sell high vs buy and hold – which is best for investors?

Though there may be some near-term tension, most investors will look past the pandemic. Investors should leverage any correction in the stock market as a buying opportunity as any lower levels from here can be a great opportunity for long term investment. While sectors such as Chemicals & Fertilisers, Pharma, IT services, FMCG and Telecom have a strong potential even in case a lockdown is imposed; banking, media, real estate, retail and engineering may weaken depending on the degree of severity. However, short-term investors should not take any new position in such turbulent times. The situation is good for long term investors who can accumulate quality stocks.

To summarise, long term investors should continue to invest aggressively in a systematic manner without worrying about temporary blips. It is better to diversify the portfolio to reduce the impact of volatility.

Conclusion

The stock market remains range bound as investors are unwilling to take bullish positions at a time when the second wave of coronavirus is taking a heavy toll on human lives and the economy. While the government’s repeated insistence on not imposing a nationwide lockdown has kept investors from panicking, the localised lockdowns have fogged their ability to forecast economic activity. Also, there is limited clarity on how long the emerging situation will drag on.

All that is required at the moment is that investors need to be a little careful. Stay invested and stay positive.