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Market is fretting about new wave of COVID-19, this sell-off should not worry you: Experts

The sharp sell-off indicates investors are nervous that the hopes of a strong economic rebound and healthy corporate earnings will be dashed if the pandemic is not brought under control soon.

April 12, 2021 / 04:00 PM IST

The Indian market has been witnessing strong bouts of volatility since the beginning of March after the COVID-19 cases started to surge again in several states of the country.

As many as 1,68,912 more people tested positive for COVID-19 across the country in the last 24 hours and India is now only the second country after the US to have the maximum number of cases.

COVID-19 has started to haunt investors again. The Indian equity market suffered huge losses in intraday trade on April 12 as the benchmark Sensex cracked 1,898 points and the Nifty nosedived to below 14,250.

Finally, the Sensex closed with a loss of 1,708 points, or 3.44 percent, down at 47,883.38 while Nifty settled 524 points, or 3.53 percent, lower at 14,310.80.

Mid and small-caps suffered more as the BSE Midcap index plunged 5.32 percent and the Smallcap index 4.81 percent.

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Read more: Sensex, Nifty crack up to 3%; 5 factors that are spooking investors

The sharp sell-off indicates investors are nervous that the hopes of a strong economic rebound and healthy corporate earnings will be dashed if the pandemic is not brought under control soon.

"Various state governments have imposed lockdowns which have created a panic in the market and we are seeing selloff across sectors. All the support levels have been breached and the mood of the markets seems very bearish," Gaurav Garg, Head of Communication at CapitalVia Global Research pointed out.

"Investors are advised to exercise caution while creating any fresh positions. The volatility is expected to remain in the market because of the underlying uncertainty," he said.

Why 2021 may not be 2020 redux

Unlike last year, it is highly unlikely that a prolonged lockdown will be announced by either the central or the state governments this year.

With the availability of vaccines, the governments look better prepared to mitigate the impact of the virus now.

Also, experts point out that on the fiscal front, the government and RBI may not have many shots to fire as of now as both have already done a lot to keep the economy up and running. In simple words, the government may not be able to announce a prolonged period of lockdown.

"Both the central and state governments are not in a position to impose total lockdowns for a prolonged period. Such lockdowns could be imposed only in certain pockets or at an all-India level only for a couple of weeks," said G Chokkalingam, Founder and MD of Equinomics Research & Advisory Private Limited.

"In our view, the central government has exhausted its fiscal capabilities to borrow and boost the economy in the short-term. Most state governments’ borrowings are at a record high level. They would also find it difficult to finance the economy if they prefer to contain both social and economic activities in their totality," Chokkalingam said.

Besides, the government would not want the pace of economic recovery to meet with hiccups when recovery is at a nascent stage.

Experts point out that India needs 12 percent GDP growth in FY2022.

"As the economy is expected to contract by around 8 percent in FY2021, we need 12.7 percent growth in FY2022 which will give about net 4 percent GDP growth on a normalised base of GDP," said Chokkalingam.

"100 in FY2020 becomes 92 in FY2021 due to 8 percent contraction and if this 92 has to become 100, we need 8.7 percent growth. Hence, we need 12.7 percent growth to get a 4 percent GDP growth on a normalised base. In our view, India needs a minimum 4 percent GDP growth to maintain all-is-well," Chokkalingam explained.

Now the economy is showing optimism to come back to around 12 percent growth. Chokkalingam pointed out that at this juncture, neither monetary authority (the RBI) nor the fiscal authority (central government) can reverse this optimistic growth path in the short term.

"Even the FIIs cannot sell a big chunk of Indian stocks – an $8-billion sale of Indian equities by them brought down the overall market by about 35 percent in March 2020. It would be suicidal for them to sell a big chunk of Indian equities in the short-term," said Chokkalingam.

Sell-off an opportunity

Most market experts say that one should not be worried about the current market sell-off and instead use it as an opportunity to make a portfolio full of quality stocks which will give a return in the medium to long term as the Indian economy has just started showing significant signs of improvement.

Chokkalingam does not anticipate a more than 5 percent fall in the markets and expects quality small and mid-cap stocks to remain firm due to their attractive valuations and continued entry of new retail investors.

As per brokerage firm Prabhudas Lilladher, the long-term trends in infra, housing, IT services, pharma, chemicals, BFSI, agri and e-comm are intact which will keep the market up.

"The market is driven by hopes of structural economic recovery and high levels of global liquidity and record FII inflows. Any correction due to the second wave of COVID-19 should be used as an entry point," said Prabhudas Lilladher.

"We value Nifty at 5 percent premium to last 10-year average PE of 20.1 times on FY23 EPS of Rs 759. We arrive at a 12-month Nifty target of 16,020," said the brokerage.

The fresh selloff has brought many stocks lower and they may rise after the March quarter earnings, which is expected to be healthy.

"For Q4FY21, we estimate 21.1 percent year-on-year (YoY) growth in sales, 43.2 percent growth in EBIDTA and 101 percent growth in PBT on strong 320bps margin expansion on a low base impacted by lockdown in March 2020," said Prabhudas Lilladher.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities believes in the worst case, Nifty50 can re-test the January 2021 low of 13,600 or go to 13,000. The likely strong earnings growth could restrict any major downside in the market going ahead.

He expects a strong YoY increase in earnings across all sectors with very high growth in the case of automobiles, banks, metals & mining and oil & gas.

"We expect a net profit of Nifty50 to increase by 122 percent YoY and 6 percent QoQ in Q4FY21," Oza said.

Read more: Can COVID-19 puncture the hopes of a strong quarter?

"A mild single digit correction in Nifty50 should not cause any panic in the market. Going forward, India will remain a good buy on dips market as near-term headwinds may subside gradually and the earnings outlook may improve over the next 6-12 months," said Oza.

The great Warren Buffett has said: "Be fearful when others are greedy and greedy when others are fearful. The current market fall may indeed be a good opportunity for those who missed the bus in March 2020. The long-term outlook of the market remains positive even as the market may remain volatile in the short term.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Apr 12, 2021 12:50 pm

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