Markets may remain on tenterhooks amid fears of new Covid-19 strain

Analysts say investors should use this fall to accumulate quality stocks

The markets can remain under pressure for the next few days amid fears that the new coronavirus strain may lead to renewed lockdowns and travel restrictions, impacting the global economy.

India, on Monday, joined the list of countries suspending all flights from the UK, even as the latter imposed a more stringent lockdown. The surge of liquidity from overseas investors, the primary driver of Indian equities in the past few weeks, is also expected to dry up over the next few days with the onset of the holiday season.

“The new virus strain has already resulted in travel restrictions and is likely to impact the global economy. There is a bit of uncertainty right now and this will keep the markets under pressure over the next few days,” said B Gopkumar, CEO, Axis Securities.

The passage of stimulus in the US, however, may provide downside protection to the equity markets, with the US Congress agreeing on a $900-billion fiscal stimulus. “The markets will stabilise as clarity emerges on the severity of the outbreak in the UK. Moreover, the stimulus deal by US lawmakers is likely to enthuse investors,” said Saurabh Mukherjea, founder, Marcellus Investment Managers.

“The markets should settle down in a few days, as the economic damage will get worked out and central banks will spell out their accommodative stance. In the end, it will all boil down to how quickly countries can roll out the vaccine and the pandemic can be contained,” said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies.

Experts, however, do not rule out a significant correction in the coming days. According to Deepak Jasani, head of retail research at HDFC Securities, Indian equities may see a mild recovery in the next few days after the market digests the news about the new virus strain, but the recovery may be short-lived.

“We may see the beginning of a significant correction around mid-to-late January as the earnings season kicks in, and the market turns its attention to valuations, the asset quality of banks, lacklustre economic and credit growth, and other local and global evolving triggers. FPI flows may be a key determinant and if the flows taper off, a correction of 8-15 per cent cannot be ruled out starting January,” said Jasani.

While Gopkumar does not expect dismal results in Q3, the BFSI space could potentially spring up negative surprises as asset quality concerns remain.

“The market may consolidate in the near term until concerns over new strain subside. Further, with the Christmas vacation starting, FPI liquidity may slow down, thus constraining the markets. 

However, the overall structure of the market remains positive on the back of abundant liquidity and effective vaccine rollout. The market may also be volatile given monthly F&O expiry this week,” said Siddhartha Khemka, head — Retail Research, Motilal Oswal Financial Services.

“Technically, the Nifty has tested the lower band of around 13,150 and its breach may trigger a further decline towards the 12,700-12,800 zone. In case of a rebound, the 13,400-13,600 zone will act as a hurdle. We suggest avoiding naked leveraged trade in the futures segment and preferring option strategies until the markets stabilise. Investors, on the other hand, should utilise this fall and accumulate quality stocks on dips,” says Ajit Mishra, VP-research, Religare Broking.