Yahoo Finance Why market correction won't be as steep as in Mar 2020 despite surging COVID cases
The second wave of coronavirus in India has led to fresh mini lockdowns and night curfews. The number of cases has crossed the peak achieved during the first phase sending the markets in a tizzy.
Mumbai, the financial capital of the country, has imposed a weekend lockdown which could shave off Rs 40,000 crore worth of GDP as per a report by CARE Ratings.
Lockdowns impact the supply demand dynamics of industries. Supply of labour, raw material is affected. So is the demand as people tend to postpone purchase of big ticket items/curb their discretionary spends during such lockdowns.
Globally also due to the surge in cases many countries have re-imposed lockdowns namely France, Poland, Hungary, Italy, Belgium, Kenya and the Philippines.
The Centre, in a statement on Tuesday, said that COVID-19 is spreading faster in the second wave and the next four weeks are critical.
The markets crashed by almost 1,000 points on Monday. In the last week it has declined by 1.87%. The markets are nervous about the second wave and this could determine which way markets move in the next four weeks.
Localised lockdowns derail the supply chain infrastructure. Jobless migrant workers and daily wagers have started to leave for their villages again, says a Times of India report. Over 1.15 lakh cases were registered on April 6.
The markets could correct big time as per some analysts. The narrative borders on the belief that India is on the second wave and based on earlier pandemic data the second wave tends to be more problematic.
We believe that the correction will not be as steep as the March 2020 when the market fell 36% between Jan 31 2020 (when the first case was found in India) and March 23, 2020 when the lockdown was imposed.
The key reasons for the same are as follows :
1. Pandemic-centric
Unlike last time the spread now is more concentrated in select districts and that too within a handful of states. The mutation and impact of the virus has been well assessed resulting in lower intensity of impact on infected persons as well as falling mortality rates.
The vaccine is already out (which was not the case in the earlier pandemic cases). There have been more people vaccinated than the absolute number of people who were infected.
With the pause in exports of vaccinations for the next 2 months, the number of working population (unlike the non working population vaccinated till April 1, 2021) to be vaccinated will increase exponentially.
The high risk cases (comorbidities, senior citizens) have already received their first dose (and some the second too).
2. Economic centric
Despite severe restrictions till February 2021, GDP had almost reached the level of March 2020 and started rising sharply, reflected in all time high GST collections.
Infrastructure spend, higher tractor sales, rise in steel demand (despite surging prices) all point towards a revival.
Government is more aware of how and what to do, to control the rising surge. This is evident by different state governments initiating curbs on different activities rather than a uniform approach.
The sheer oversubscription figures of some of the IPOs highlight that investors are reallocating capital and hence continue to be bullish / optimistic on equities.
Lastly, we would like to highlight that the correction was anyways due after - (i) Equity indices doubling within 1 year, (ii) Large number of IPOs, (iii) Sharp uptick in government’s borrowing program to fund the revival, and (iv) rising yields not only in India but also globally.
However, we reiterate that the correction will not be as steep, due to better preparedness on the coronavirus front and better shape of the Indian economy. But, volatility could be the order of the day!
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