Mumbai: Foreign funds, pulling money out of Indian equities on concerns such steep valuations, a hawkish US central bank and a stronger dollar among others, have one more reason to remain cautious on stocks here: the new Covid variant. With these overseas investors getting into a risk-off mode in emerging markets, including Asia, equity strategists and global money managers are keeping a watch on the extent of the outbreak that will determine their future allocations.
“If it turns out to be a serious impact, then all bets are off on all asset classes; and if it does not become a problem, we may see a bounce or relief in the market,” said Sanjay Mookim, strategist and research head at JPMorgan India, which is ‘neutral’ on Indian equities within emerging markets.
Foreign Portfolio Investors have been on a selling spree of late, offloading shares worth over Rs 4,000 crore daily on an average since last week. The selling was triggered by worries about the likelihood of a more aggressive withdrawal of the stimulus package by the US Fed with growing inflationary pressures, resulting in dollar strengthening and bond yields rising. Worries about the spread of the new Covid variant-Omicron- have added to the jitters.
“We may probably see a 5-7 per cent downside in markets, high beta names could fall 10-15 per cent and large caps could fall anywhere between 5 per cent and 10 per cent,” said Rahul Chadha, chief investment officer at Mirae Asset Global Investments in Hong Kong.
The Sensex and the Nifty have already dropped 8 per cent from their peaks in October. Further declines could ease the valuation concerns.
Motilal Oswal Financial Services said the Price to Earnings (PE) ratio at 23.3 times FY22 estimated earnings and 19.5 times FY23 estimated earnings are “relatively reasonable”.
Chadha believes any near-term correction should be used as an opportunity to buy.
“Another 5-7 per cent down, the market would be attractive. But one has to be mindful to deploy funds in a staggered way,” Chadha added.
The sell-off in the stock market paused on Monday as investors awaited more clarity on the potential impact of the virus.
“The new Covid variant is too new to get a good picture but we hope that the vaccines – with modifications if needed – will be able to handle this strain,” said Samir Arora, founder of Singapore-based Helios Capital.
Chadha of Mirae will invest with the assumption that as long as hospitalisations are low, the impact won’t be as severe.
“Even in the worst case scenario, in about three-four months, the new mRNA vaccine should be ready. As long as hospitalisations remain low, policy makers are not going to lock down the economy,” said Chadha.
Even if equities manage to tide over the Covid concerns, it won’t be easy sailing for investors as companies face a stiff challenge of maintaining the earnings momentum in the wake of rising input costs.
“We have to worry about companies delivering on earnings as inflation and oil prices will be main concerns going forward,” said Mookim.
“We are not bearish on Indian equities, although returns will be more moderate than we have seen in the last 18 months,” said Arora.Internet Explorer Channel Network