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New Covid-19 strain in UK headwind for markets: What next?

The market was already in an overbought position with huge foreign investment flows pushing up the Sensex to new peaks. The vulnerability of the market was high due to quick gains made in the ongoing rally leading to low margin of safety.

Written by George Mathew , Sandeep Singh , Edited by Explained Desk | Mumbai, New Delhi | Updated: December 23, 2020 12:14:08 pm
Explained: Why the Sensex plunged 1407 points todayTravel restrictions imposed by several countries to and from the UK have added concerns of yet another lockdown. European market witnessed further selling pressure as the UK and EU failed to reach a trade deal before the decided deadline.

Domestic stock markets which were going strong and hitting new peaks on a daily basis till last week took a heavy pounding on Monday with the Sensex plummeting 1,407 points, or three per cent, as a fresh wave of lockdowns were imposed across Europe and as the new variant of coronavirus in the UK dampened sentiments across the world.

What led to the three per cent fall in stocks?

The new variant of the Coronavirus in the UK spooked markets and stocks witnessed intense selling throughout afternoon trade. “While the street was bracing for a correction this week after a sharp up move, the sheer velocity of the fall across broader markets took the bulls by surprise as practically none of the key indices constituents were in the green today,” said S Ranganathan, Head of Research at LKP Securities. The Sensex fell 1,407 points to 45,533.96, its biggest fall in seven months, and the NSE Nifty plunged 432 points to 13,328.40. All sectoral indices ended in the negative with PSU banks, media, metals realty, auto, banks and pharma indices leading the downtrend.

Travel restrictions imposed by several countries to and from the UK have added concerns of yet another lockdown. European market witnessed further selling pressure as the UK and EU failed to reach a trade deal before the decided deadline. Markets are worried about the economy taking a U-turn again if lockdown is imposed and businesses are shut to tackle the new variant.

Will the market fall further?

The market was already in an overbought position with huge foreign investment flows pushing up the Sensex to new peaks. The vulnerability of the market was high due to quick gains made in the ongoing rally leading to low margin of safety. If the new Covid variant spreads across the world, there is a possibility that the market will witness further declines. However, if countries are able to tackle the spread of the pandemic, the markets will bounce back in a few days. “We do not expect a big correction… but rather a consolidation in the short-term, of not more than 7 to 10 per cent in the main indices. Buying at dips can be considered as a strategy in the falling market,” said Vinod Nair, Head of Research at Geojit Financial services.

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Why did the markets rise over the last couple of months?

The sharp rise of markets over the last few months were fuelled by record inflows by foreign portfolio investors on various accounts. If improved economic data on the consumption front helped the market rise in September and October, in November, the US elections and announcement of vaccines by four contenders (each showing high efficacy) lifted the investor sentiments worldwide. The better than expected GDP growth numbers for India for the second quarter ended September 2020 at (-)7.5 per cent also gave hope to investors and market participants alike.

While FPIs have pumped in a record of 208,974 crore in the current financial year (as of now), the momentum of their inflow only picked up further in November and December. While in November they invested a net of Rs 60,358 crore, in December (till date) they have pumped in another Rs 52,699 crore. Thus in November and December itself, they have infused a total of Rs 113,057 crore. The FPI inflow in the last two months lifted the Sensex by 11 per cent between November and December before the sharp fall seen today (Monday).

Domestic institutional investors, on the other hand, have been mostly selling and in the current financial year, they have sold equity holdings worth a net of Rs 102,462 crore. In November and December, they sold holdings worth Rs 77,990 crore led by profit-booking by mutual fund investors.

What should investors do in current scenario?

While the recent concern over new strain of Covid-19 in UK— which spreads more quickly than previous variants — spooked the markets, it is not something that long-term retail investors should be too worried about and should continue with their disciplined monthly investments. Even as several countries including India have announced temporarily ban flights from UK to their country after the emergence of the new and more infectious strain of the coronavirus in Britain, investors must remember how the markets recovered after the crash it saw in March.

Though it is a concern for the near-term as the markets may see some more correction as the development threatens to delay the return to normalcy that the world was looking forward to (after the vaccines came in), it should not be a big cause of concern for the medium to long term investors. They may stay away from sectors such as aviation and hospitality that still remain susceptible and may continue to remain impacted but investors can look to buy on dips in fundamentally strong companies across FMCG, pharmaceuticals, banking among others. The best way to invest though is through mutual fund SIPs. Those who thought that markets ran a bit too high over the last couple of months and were scared to enter, can look to invest for the medium to long term.

Asset allocation should remain a key and one should not overexposure their portfolio in favour of equities and equity investment should be in line with your broader financial goal.

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