Blood on the Streets

The new Covid variant named Omicron, by WHO along with classifying it as a variant of concern, has been causing global markets to panic. We try to understand early impact and analyse market volatility from here on.

Impact till now

Nifty closed 2.9% lower yesterday while US markets were down 2.2-2.5% and European markets fell more than 3.5%. Brent oil also saw fall of 10%+.

Why the fall

The variant which was detected in South Africa initially was recording about 200 new cases daily which has over a week increased to 1200+ on Wednesday and 2400+ on Thursday. Initial testing indicated higher mutations which increased uncertainty at a time when markets globally were pricing in economies opening up and getting back to normal or strong growth over next couple of years.

What to expect from hereon

The next few weeks will be crucial as more updates from South Africa emerge alongwith reports from WHO. The key parameters that markets will be keenly watching are:

• Transmission: How fast and easily does it spread
• Fatality: Requirement for hospitalisation and mortality rates
• Immunity: Cases and their fatality among vaccinated population

Our View

We continue to maintain a positive medium term outlook on the markets. While the uncertainty adds to headwind on an already stretched markets, the correction also provides a good entry level. Our optimism emanates from the last 1.5 years policy action highlighting ability of healthcare sector to contain the impact alongwith central banks’ ability to support the economy in a crisis. This however needs to be taken with a pinch of salt as based on past experience from Delta variant, vaccine ma    ker BioNTech had mentioned that any modification to existing vaccine takes about 6 weeks, add to that another testing and rollout period can set us back by a few quarters again. Add to that already stretched balance sheet of central banks and it can all end up being another round of heightened volatility.

But for the time being till there is more data to support a worse case, we are cautiously optimistic about the future – maintaining a buy on dips stance while going slow as further clarity emerges on the fatality of Omicron. It is also a good time to rejig portfolios / holdings on the mid/small cap and align towards a more balanced portfolio.

Team Tailwind

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