How stock market showed robust weekly gains despite devastating second Covid wave

India is currently undergoing a resurgence of coronavirus. Economic activity is at an all-time low during the second wave, but the stock market is moving more in line with its global peers and which, despite the stumble, has been on a bullish trajectory overall. A secondary research conducted by the leading stock trading platform, mastertrust, revealed the trends observed in the functioning of the stock market in times of Covid-19.

First Wave & Its Impact 

During the first wave of the Covid-19 pandemic, several measures had been taken by the Central Bank and the government to pump in liquidity and boost economic activity. The overall package which came out toRs 20,97,053 crore, included the Rs 1.92 lakh crore stimulus from measures that were announced by Modi government such as the Pradhan Mantri Garib Kalyan Package worth Rs 1.7 lakh crore. A big chunk, in fact the largest, worth Rs 8.01 lakh crore of the economic package, belonged to the various measures adopted by the Reserve Bank of India in February, March and April 2021 to inject liquidity.

Therefore, in the first wave, from March 2020 to November 2020, Nifty index made a bottom of 7511 and high of 13145.85.

Second Wave & Its Impact

Currently, India is witnessing the second wave of coronavirus infection, which is more adverse due to the high death rate as compared to the first one. The first wave of the COVID-19 spreadwas subdued in India during the first week of November 2020. Subsequent to facing the brunt of the crisis and resultant lockdown last year, the recovery pattern in corporate profits continues to be strong. However, as the second wave wreaks havoc on the economy, its recovery and revival are likely to be delayed. In the event of this, the organised/corporate sector may be impacted much less as compared to the unorganised sector. 

The anticipation that Indian economy would not take as big a hit as the previous year has also been reflected in the rupee, which has been able to recoup majority of last month’s decline. Another point is that the benchmark government bond yields have further eased about 11 basis points after the central bank announced its version of quantitative easing in April. 

Moreover, foreign institutional investors (FIIs) have continued their buying spree of Indian equities. The consistent buying interest by FIIs is driven by abundant liquidity, development of vaccines, slight signs of economic recovery and expectations of stimulus packages coming in from developed countries. The adjustment in the MSCI Index has aided the sentiments.  Even robust corporate earnings at home further raised favourable sentiment in the Indian markets.

During the first wave, it was widely observed that more than 43% of the FII Investments were in the Banking & Financial Service sector followed by FMCG, Oil & Gas and Pharmaceuticals sector They were major sellers in Telecom and Metal & Mining. The second wave seems to be a redoing of what happened in the months from March-June 2020. However, it isn’t the same from the market point of view. When the pandemic initially broke out, there wasn’t much awareness about it as it was a completely unknown and unprecedented catastrophe that had struck the world bringing it to a halt. How the crisis would impact global governments and central banks and to what extent economies would contract nobody could predict. 

But now the impact can be estimated to some extent. Instead of announcing a nationwide lockdown or a global lockdown, governments are rather ready with a localised response whenever required. Moreover, having been through it the first time around, companies are now better equipped to deal with the effects and continue operating as they have worked out the procedures for functioning under a lockdown, have cut unnecessary costs, streamlined business operations and, in several cases, raised capital. The current staggered, state-level restrictions placed on non-essential services instead of a blanket nationwide lockdown indicate that the overall impact of the second wave is much likely to be limited compared to the first wave.

“The stock market is currently supported and supplemented by global sentiments and liquidity. Though India is witnessing a surge in Covid-19 cases, several of the developed nations are seeing a consistent decline. Hence, this is significantly supporting the Indian markets. Also, the gains are justified by central bank stimulus both at home and abroad. This is coupled with signs that the current second wave in India is peaking and building optimism around the fact that India’s economic growth in the long term will emerge intact from the crisis,” said  Palka A Chopra, Senior Vice President, Master Capital Services.

Covid-19’s impact on the stock market was completely opposite in the second wave as compared to the first one. The Indian stock market has been continuously posting strong weekly gains despite rising cases and declining economic activity.

The major positive signs are that there is no large-scale lockdown like last year which led to a curb on the economic activities. The development of the vaccine is another reason which caused the stock market to not fall and played an important role in the revival of the markets and GDP of the country.

Good earning season also had a major impact as a large number of firms reported robust financial results. Many blue-chip companies have witnessed a rise in their value on the stock market due to better outcomes.In view of the strong earnings season and commentary, investors are hoping that most of the stocks will continue to perform well in the future, well beyond the second Covid-19 wave. The earnings commentary of maximum companies is positive resulting in more buying in the economy. As per Bloomberg (Quint), the average monthly correlation between returns on India’s Nifty 50 and the S&P 500 rose to about 85% last year, compared with a 70% correlation over the longer term.

Predictions for the Third Wave

If the vaccination drive is not effectively ramped up against the coronavirus and COVID-19 appropriate-behaviour is not observed strictly, there is a looming possibility of a third wave in another 6-8 months. Though laxity on people’s part may make the third wave inevitable, its timescale cannot be predicted as to when it may occur. 

If strong measures are taken, the third wave may not happen in all places or indeed anywhere at all. It depends much on how effectively guidance is implemented at a local level in states, districts and cities. 

The third wave may come as a rude shock to some service-oriented companies engaged in travel, tourism and hospitality businesses. Restaurants, hotels and similar establishments have already faced huge losses during the ongoing crisis and have barely recovered from the first two waves. Another wave could be a death knell for many such businesses. While travel, tourism and hospitality sectors will foremost feel the heat of the third wave, other important sectors like trade, construction, real estate and retail will start facing losses if the situation does not improve.

Therefore, caution is warranted highly as so much about the pandemic – and the effects of its interplay with an ill-prepared and overwhelmed healthcare system – still remains unknown. 

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