Covid 2.0 and markets: Why the Indian market may not gasp for O2 due to Covid Wave 2

With the unexpected Wave-2 of the Covid-19 pandemic, there has been a general fear of uncertainty and of the unknown. One such unpredictable zone in these times, and as always, is the capital markets. Could March 2020 be repeated when our markets tanked 37%? Is it a reason to worry?

While the darker shadow of many unknown things is natural, there are quite a few positives this time around, because more things are known in this wave compared to Wave 1. Also, Wave 2 is not necessarily similar i Don 1.

First of all, Wave 2 is mostly just an Indian phenomenon. Reflecting on the Wave 1 situation, it was heartbreaking because it was shy and because it was a global cause – this had an impact country after country. As a result, global markets were in turmoil and India also had its fair share.

This time, so far, it’s just an Indian situation, and there is no significant new wave in any other country. Markets elsewhere are trading normally so far.

Secondly, in the first wave, several bold measures have been introduced and implemented to boost economic activity and accelerate economic recovery, globally as well as in India. Globally, significant liquidity has been pumped in and that money remains in the system today. Also, the subsidies given by governments in various countries, including India, helped people to overcome the financial strain and continue to make their impact in these times.

Furthermore, consumers worldwide have accumulated an additional $ 5.4 trillion in savings since the pandemic began, and are becoming increasingly confident about the economic outlook, paving the way for a strong rebound in spending as businesses reopen .

Third, the regulators and policy makers this time are not caught in an unprecedented position. They have been there last year, tried various measures and tasted success. They are alert and active – ready to move quickly wherever corrective action is needed.

Finally, despite the rapid growth of the virus and the worsening situation, we do not expect a serious shutdown as last year. Governments, both in provinces and at the Center, are aware of the economic cost of total shutdown and would take calculated measures to ensure continued economic activity.

Of course, some words of caution are needed. Must remember:

  • If the current crisis continues unabated and becomes truly uncontrollable, we can expect a tougher shutdown like last year. This would certainly be detrimental to the economy and economic recovery. Today’s areas heavily affected by virus like Maharashtra, Gujarat, Delhi and Karnataka are also the drivers of the country’s high economic growth. If these areas go into lockdown, that could potentially address the economy.
  • Even if the government does not enforce strict locking, excessive fear of the spreading virus can itself force people into a kind of self-imposed lockout, again affecting the economy. People, because they are extremely cautious and scared, may not return to work soon – we are coming out of a major downturn, and this may extend the recovery period.
  • Since our government significantly loosened the purse cord last year, the availability of resources to cover future events will be limited. The government deficit may also widen as tax and tax-free revenue collection may not be on target and there will be limited scope for government to control spending. This could lead to a tick on interest rates, affecting the market.
  • Current market levels have included expectations of significant economic change and good corporate performance, which may not be a reality anytime soon. In such a scenario, a downward revision of estimates could lead to market correction.

A simple two-pronged solution can do the magic.

First of all, ensure pandemic security protocol is followed by all Indians. Unfortunately, once the lockdown was lifted in India, we dropped our guard completely between Diwali and Holi. To beat the current renewed crisis, lock-down is not a permanent solution, protocol is. A temporary measure was to lock down to get breathing time to break the virus chain and get our house in order.

Second, government finances should be managed with wisdom and rigor. Any slippage in the government deficit can adversely affect the markets.

In summary, what can fuel the prospect of a rapid market rebound is the fact that the current crisis is India-specific and not global, and that the economy is sufficiently primed. Along with this, like last time, our regulators are very active and agile to manage any situation. During Wave 1, we did not miss even one minute of market operation and it is very likely to be the same case this time as well. In the short term, markets may experience volatility, but for the most part it may not be gasping for O2 and should remain in good health!