Imminent Second wave of Covid 19 is Happening

Indian indices took a nosedive last march in 2020 amidst Covid concerns and nifty touched a low of 7500. Since then, it’s a vertical rally, what we call a V- shaped recovery and Nifty touched a high of ~ 15500 in 2021 overtaking its previous high of ~12400. Almost everyone thought that Covid 19 is over and we are out of the pandemic. Its just at this feeling and moment, the imminent second wave of Covid 19 has begin and is happening.

The sectors which were laggard from last 3-4 years:

-Metals

-Pharma

-PSU, etc.

turn out to be one of the best performers in last one year.

What changed after Mar’20 was the action by central banks to be dovish and coming out with monetary and fiscal support for their respective economies.

This leads to a reflationary scenario and leads to higher GDP and inflation.

In a inflationary scenario, the prices of products, commodities, services, etc go up and mostly its because of higher demand. This also means that margins of companies take a hit as raw materials prices go up and they cant increase the prices of finished products in same proportion, as it risks their volume and revenue.

Still, an overall economy does a lot better when there is inflation as compared to when there is deflation.

The classic case in hindsight for same is the period from 2002-08, when the whole inflation and reflation trade played out so well and it was a boom time for corporates, individuals, professionals, economies.

As we say that history doesn’t repeats itself but it do rhymes, this period from 2020 is believed to be the same case of higher inflation, higher monetary and fiscal support by major central banks across the world, to increase output, demand, sentiment, etc.

Hence, it’s expected that Indian and major developing markets will do well during this phase.

However, in India, from April’21, we have started seeing the second wave of Covid where in fresh daily cases have again spiked to more than 1 lac. The same situation of higher daily cases is also seen in US, Germany, Brazil, etc. This leads to restrictions and lockdowns, thus bringing down the pace of earnings recovery which was anticipated by street in 2021.  

Although a parallel argument of vaccines, available covid treatment, awareness of what needs to be done can be given, but it doesn’t takes away the fact that pace of recovery will be slow and not V shaped, as was in the consensus.

If we take a look at major markets across the world in April’21,

• Dow Jones –  Touched an all time high of 33,800
• Nasdaq – Is at an all time high of 13,845.
• S&P- Made an all time high of 4128.
• Dax- At an all time high of 15235.
• FTSE –  Is closer to 7000.

Its only Indian indices which are under performing and the reason is Covid’s second wave.

As per me, in this quarter, with some help from weakening rupee, sectors which will render support are:

• Metals – The cycle has just begin after a lull of many years and will last for atleast 2-3 more years.
• Information technology – Digitilisation is the the new disaster recovery plan and buzz strategy for every entity. This will ensure good deal wins, consistently high revenue and better margin for these companies.
• PSU
• Pharma
• Capital Goods
• Cement
• Real Estate
• Auto’s –  As the demand for personal mobility would be on rise amidst covid concerns.

The sector which are high beta and could take time to deliver are :

• Banking
• Consumer discretionary like Malls, Cinemas, Cruise, etc.
• Restaurants
• Small retailers
• Small and medium enterprises

as they are affected by lockdowns and sentiment.

But here also looking at the stance of RBI and favorable credit cycle, it’s a matter of time, before they join the list of performers.

Our stance is cautiously positive on Indices with major action happening on individual stocks like Adani group, MF companies, Life insurance plays, JSW steel, Sail, Hindustan copper, Hindalco and the likes.

Be cautious and look at the range of 14250-15000 on Nifty.

The decisive movement on any side will be seen in direction of the point where this range is breached.