Third COVID wave fear looms; here's how to plan for uncertainty in market

After two successive days of losses, Indian equity barometer the Sensex jumped more than 600 points in the morning trade on May 21, supported by gains in banking and financial heavyweights.

The market has been swinging between gains and losses as a furious second coronavirus wave continues to weigh on sentiment.

In recent days, daily infections have fallen but still remain high and while the market seems to be factoring in the end of wave two, the possibility of a third wave looms.

The daily rise in coronavirus cases in India remained below 3 lakh for the fifth consecutive day, with 2.59 lakh new cases recorded in the last 24 hours, the Union Health Ministry data update on May 21 morning showed.

Health experts and doctors say a third wave looks inevitable and may affect children in large numbers.

According to a three-member expert panel set up by the government, the third wave may hit India after six months. They expect the current surge to settle by July.

It is hoped that with a significant portion of the population vaccinated, the impact of the third wave wouldn’t be as severe.

But as on now, a lot of uncertainty remains and the market may nosedive if fears about the third wave come true.

Betting on quality stocks remains the key at this juncture and the best way to minimise risk is to play a mix of defensive and economy-driven stocks, say experts.

"Short-term investors can have a decent mix of 40 percent defensive stocks and remaining 60 percent in economy-driven stocks. Also from a market orientation perspective, one can have 60 percent in largecaps and 40 percent in midcaps for the near term," said Rusmik Oza, Executive Vice President (Head of Fundamental Research-PCG), Kotak Securities.

"These two approaches can help wither any near-term volatility and help in generating decent performance in the short-to-medium term," he said pointed out.

In defensives, it is ideal to have a higher mix of IT companies followed by FMCG, telecom, insurance, tractors and export-driven companies, Oza said. In the economy-driven stocks, he favours playing the

revival theme in terms of higher government expenditure and pick in personal consumption.

"Here one can look at private sector banks, oil & gas, capital goods, construction and retailing. Within the NBFC space, we like housing finance companies because of pent-up demand and decade-low EMIs," Oza said.

Vinit Bolinjkar, Head of Research, Ventura Securities said one should start booking partial profits, especially in small and midcap names given the rally in recent days. In largecaps, one should look more at bottom-up than top-down for allocation of money.

"With high wholesale inflation, interest rates have little room to go down from here and hence it is better to take some money off from the table and remain sideways till we get a clear view," said Bolinjkar.

How the third wave would pan out is something that nobody knows. Hence instead of trying to forecast its magnitude, the wiser thing would be to keep patience and wait for the right time to enter, he said.

Likhita Chepa, Senior Research Analyst, CapitalVia Global Research, favoured staggered investing.

"Risk-averse investors can include top-rated mutual funds and bond funds in their portfolio to avoid the risks arising out of direct investing. Short-term bonds can be an attractive option for investors who do not wish to invest in FD’s but are looking for tax efficiency. Similarly, one can invest in small saving instruments depending upon their investment horizon," said Chepa.

For those looking to directly invest in equities, they should have a stock-specific approach and opt for diverse sectors. “It is advised to have a significant capital allocated to the debt segment also in order to earn a better return considering the potential uncertainty which another wave of COVID could bring," Chepa said.

To deal with any sort of uncertainty, one has to have an asset allocation plan to meet financial goals over the next few decades based on one's risk appetite and return expectations, said Deepak Jasani, Head of Retail Research, HDFC Securities.

"Having done that, one will have to check whether the equity portion is as per the plan or it has gone up due to the rise in equity values; in which case one will have to take profits in equities to bring the value to the planned proportion," he said.

In case the equity investment is lower than planned, then one can gradually build portfolio among diverse sectors and segments like largecap, midcap and smallcap, considering the risk appetite and the skill in understanding equities, he said.

For investors with a higher risk appetite, larger exposure to small and midcap is preferred. Among sectors, appropriate exposure to financials, auto, capital goods, IT services, cement and construction may be taken, Jasani said.

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.