Will the Stock Market Crash Again in 2021 After the Return of COVID?
Fearing a complete lockdown, the stock market opened in red this week amidst the growing fear in people of a complete lockdown in many states of India. Sensex, which is the benchmark index, plummeted 1,700 points in intraday trade. The market crash today has given rise to fear of the same thing happening that happened exactly a year ago, when the benchmark indices went down by 40% in two weeks.
This raises a concern, should investors be ready for another market crash? What is the correct investment strategy in such unprecedented times?
Palka Chopra, the senior Vice President at Master Capital Services says, "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 some time back. The volatility is expected to continue for some time."
The fact that India VIX is trading 17% higher at approximately 23 levels, shows the increased volatility in the markets. From the investors’ perspective, it is indicative of the volatility of Indian markets.
Nonetheless, it is quite unlikely, a market crash like last year’s. According to Abhinav Angirish, the founder of Investonline.in, there won't be more than 10-15% correction in the equity market due to the return of coronavirus.
He says, "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 has IT spending."
He further goes on to explain that the government believes it to be beneficial to spend money even at the cost of a rising fiscal deficit. This way, it will limit the impact of a prolonged Covid crisis. The consumer sentiment is improving which is evident from rising auto sales. The Foreign Portfolio Investors (FPIs) are enthusiastic about the Indian economy. This is evident from the record inflows in FY 2020-21.
There may be some short term tension but most investors will look past the pandemic. Experts are encouraging the investors to use any correction in the stock market to invest. They feel any lower levels from here would be great to for long term investments.
According to Chopra, "Use the stock market correction due to coronavirus fear. Equity investors can invest in 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."
Gaurav Garg who is the Head of Research at CapitalVia Global Research, advises the short-term investors to stay away from the market. He says, "Short term investors should not initiate any new position. However, long term investors should use the opportunity to accumulate quality stocks.”. In this phase, he advises the investors to build a quality portfolio in Pharma, FMCG and IT as these are the sectors that are expected to do well even in case the lockdowns are imposed once again.
According to Axis Securities's report, taking hints from last year's lockdown, in the worst case scenario, the least risk facing sectors are Pharma, IT, Chemicals & Fertilisers, Telecom and FMCG from EPS/PE erosion.
However, if a partial lockdown is imposed, according to Axis Securities, the sectors that may continue to perform well include FMCG, infra, resources as well as cement. The report says, "That was even witnessed from the September quarter performance." said the report. So, the sectors that will suffer the most in a partial lockdown shall be media, engineering, real estate and retail.
In any case, investment experts believe that in the long term investors should not worry about temporary setbacks and should continue to invest systematically. They say that although they 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 you are concerned by this volatility, please seek advice from your financial advisor to make the right investment choices.