Covid returns: Will stock market crash again in 2021?

Stock market opened the week in red amid growing fears of complete lockdown in Maharashtra and other states as Covid-19 cases continue to rise. The benchmark index Sensex plunged 1,700 points in intraday trade. Today's market crash has triggered worries of a scenario like last year's when nationwide lockdown had left the stock market bleeding with benchmark indices plummeting around 40 per cent in a span of two weeks.

So as the cases mount, should investors fear another market crash? What is the correct investment strategy in such uncertain times?

"Global equity markets, including Indian markets have rallied a lot since the last market crash. The Covid-19 pandemic is a good enough reason to witness a correction. Equity markets may correct in the near term as there has been an increase in volatility. The probability that the markets could go into a phase of correction is greater than going significantly higher from the levels which we have seen sometime back. The volatility is expected to continue for some time," says Palka Chopra, Senior Vice President, Master Capital Services.

India VIX is trading 17% higher at around 23 levels which shows increased volatility in the markets. The India VIX indicates the volatility of Indian markets from investors' perspective.

However, a market crash like last year's is unlikely. Abhinav Angirish, Founder Investonline.in, believes there won' be more than 10-15 per cent correction in equity market due to return of coronavirus.

"The past year's fall can be termed as a knee jerk reaction. The present market has already discounted the worst and is anticipating the improvement in earnings in the coming quarters. Economic indicators like tax collection are showing buoyancy thereby clearly indicating that the worst is behind us. Manufacturing activity has gathered pace and so is IT spending," says Angirish.

He explains government is in favour of spending even at the cost of a rising fiscal deficit, which will limit the impact of a prolonged Covid crisis. The consumer sentiment is improving as is evident from rising auto sales. The Foreign Portfolio Investors (FPIs) are gung-ho on the Indian economy. This is evident from the record inflows in FY 2020-21.

There may be some near-term tension but most investors will look past the pandemic. Experts urge investors to use any correction in the stock market to invest. They feel any lower levels from here would be a great opportunity to invest for long term.

"Use the stock market correction due to coronavirus fear. Equity investors can invest on corrections. Therefore, if you see any kind of a correction in the market, that would be a buying opportunity.  Invest in the sectors which have strong potential such as IT, metal, pharma. Banking remains weak which may reverse its trend in coming days," says Chopra.

Amidst such high degree of volatility, Gaurav Garg, Head of Research, CapitalVia Global Research advises short-term investors to stay away from the market. "Short term investors should not initiate any new position. However, long term investors should use the opportunity to accumulate quality stocks," he says.  In this phase, Garg recommends investors to build a quality portfolio in sectors like Pharma, FMCG and IT as these sectors are expected to do well even in case the lockdowns are imposed.

According to Axis Securities's report taking cues from the last year's lockdown scenario, in the worst case scenario of a lockdown, least risk facing sectors include Pharma, IT services, Chemicals & Fertilisers, Telecom and FMCG from EPS/PE erosion.

However, in the event of a partial lockdown, as per Axis Securities, the sectors that shall continue to perform include FMCG, infra, resources as well as cement. "That was even witnessed from the September quarter performance," said the report. So, the sectors as per the brokerage that will suffer the most brunt in a partial lockdown shall be media, engineering, real estate and retail. And the impact on auto will be based on the degree of severity.

In any event, investment experts believe, long term investors should not worry about temporary blips and continue to invest aggressively in a systematic manner. They say while one should not be fearful, an investor should stick to his or her asset allocation and keep investing towards goals. "Diversify your portfolio to reduce the impact of volatility," says Angirish.

If this volatility concerns you, it is better to seek advise of your financial advisor to make correct investment choices.

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