The market continued its downturn on Tuesday after a deep crash on Monday as India fights the second wave of Covid-19. In a volatile session, the Sensex settled 243 points lower, while Nifty closed at 14,296.40. Since governments are imposing state-level lockdowns, the doubts on the nascent economic recovery are obvious. However, the announcement for a mass vaccination drive from May 1 is giving some hopes.
Will the market see more downtrend?
The bottom is hard to predict, says Rupen Rajguru, Head of Equity Investment and Strategy, Julius Baer. "However, this would be 'buy the dips' market. A pick-up in the vaccination drive, and the lagged impact of easy financial conditions, fiscal spending (capex) and strong global growth, remain cyclical tailwinds for the markets," he says.
The Sensex crashed 10 per cent as of Tuesday's closing from its all-time high of 52,516.76 hit on February 16. The Nifty is down nearly 6 per cent to 14,296.40 from its peak.
"10 per cent correction from the Nifty peak of 15,200 brings us to 13,600-13,700 - this is where the markets should find good support," says Nimish Shah, Chief Investment Officer - Listed Investments, Waterfield Advisors.
Deepak Jasani, Head of Retail Research, HDFC Securities sees another 600-1,000 downfall if Nifty breaks the 14,200 level. "Technically if we go below 14,200, another 600-1000 points fall in Nifty over the next few weeks seems likely. Reasons for this already exist and fresh reasons could emerge in the meanwhile."
Earnings outlook
Is earnings downgrade expected in the coming quarters?
"While the second wave of Covid poses challenges to the ongoing economic recovery, consumers and businesses have adapted to the new normal, and lockdowns are likely to be localised; hence, we do not expect this wave to de-rail the economy. Therefore, we don't expect any significant impact on the aggregate earnings," assures Rajguru of Julius Baer.
Jasani advises to stay cautious as the second wave and the vaccination drive pan out. He sees concerns in the banking space and outperformance in the traditional defensives such as IT, Pharma and FMCG in the ensuing fall. "A lot will depend on when we will be back to normalcy. In case this situation prolongs in one form or other for more than a month from now, the estimated 30%+ growth in Nifty EPS may not be achieved. Apart from lockdowns and its effect on supply chains and disruption in manufacturing/trading, a bigger worry could emerge on asset quality of lenders."
What should you do?
Your own asset allocation, not the market direction, should drive your buy or sell calls. "In case your equity allocation is higher due to equity markets doing well over the past few quarters, then they could look at bringing it down to the planned allocation. Even otherwise it is never imprudent to take partial profits on stocks or sectors that have massively outperformed over the past few quarters," says Jasani.
Rajguru sees financials and domestic cyclicals as an economic leverage play over the next one to two years. "In the near term, with the news flow towards Covid second wave intensifying (before peaking out), there will be buying interest in the 'corona-proof' sectors such as Healthcare, IT and Chemicals," he says.
Shah of Waterfield Advisors advises to be selective on stocks in sectors such as auto, large private sector banks, home improvements/electrical appliances companies, chemical, pharma. "Choose companies with good market share, good growth potential that is in line with or better than industry and has consistent profitability, even if they are relatively more expensive."
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