Indian equities delivered record returns even as brokerages of late have called time on the gains. Global equities too bounced back from record lows to post robust returns. As per Swiss brokerage UBS Securities, India is all set to remain among the fastest-growing emerging markets till FY23, assuming that the activity derailed by the outbreak of the Covid-19 pandemic continues to normalise and the mobility restrictions are gradually removed.
But there is one big downside to this growth potential. UBS said “New flare-ups of Covid infections, and particularly the emergence of new Covid strains against which currently available vaccinations provide little or no protection are probably the biggest downside risk,”. The problem with new variants is that they force governments to put back in place mobility restrictions which were rolled back in an attempt to give impetus to recovery.
“Under this scenario, we model what would happen if a mutant virus came along by the end of the March 2022 quarter and push hospitalization and deaths back to pandemic highs. This scenario assumes that by late FY23 new vaccines would be available to combat the new variant, but this would substantially delay the recovery,” the firm had said in its note earlier this month.
Markets and governments have not reacted too kindly to reports of the new Coronavirus variant ‘omicron’ which was identified in South Africa. The ‘potentially more contagious’ variant has been detected in Germany, Belgium, Hong Kong, and Israel so far. Countries like Australia, Brazil, Canada, a few in the European Union, Iran, Japan, Thailand, and the US have imposed restrictions on various southern African countries after the new variant was detected.
Bourses have been taken over by the bears once again, in a manner reminiscent of the plunge seen back in March 2020. Sensex and Nifty on Friday lost 1,687 points and 510 points, respectively. European equities closed down with cuts of nearly 4%, posting the worst day since June 2020. Dow slumped over 900 points and saw the worst day this year while the S&P 500 tumbled over 2%. Oil dropped 13% and broke below $70 per barrel to post its worst day this year. What next for the markets?
Bloated valuations and rising inflationary pressures have already forced many brokerages to downgrade emerging markets like India. But Manish Singh, CIO of Crossbridge Capital LLP feels the falling market levels shouldn’t spook the retail investors. “If there is going to be a variant which is going to cause a wide-scale problem, then there will be support from the fiscal side and the measures we have been doing for the last two or three years. The investors have to really focus on whether we have a real economy going forward. The answer is yes,” Singh says.
Some analysts have pointed out that with the emergence of a new coronavirus variant, the Federal Reserve might just be forced to continue with record low-interest rates and postpone the forecasted hike. “With respect to policy rates, the surprise in the mutant virus scenario is that the US hikes policy rates relative to the baseline whereas most other countries are cutting in response to renewed economic weakness. Along similar lines, in India we expect no increase in policy rates in the mutant virus scenario,” UBS said in its note.
But on a positive note, pharma companies are moving quickly to provide protection against the new variant. Pfizer and BioNTech on Friday said that investigations on the new, heavily mutated variant of the virus are already underway. Moderna, Johnson & Johnson and AstraZeneca too said investigations are on.