Investors will have to navigate volatility from localized lockdowns, ample liquidity, and short bull-and-bear phases
One month
into FY 2022, it is becoming increasingly clear that investors will have to
tailor their strategies by co-opting the pandemic for several reasons. First, the
rollout of vaccines from the end of the last calendar year had raised hopes
that the outbreak was some months away from weakening. That might not be so. The
retreating wave has the nasty habit of coming back by mutating into more lethal
variants. The spread and decline of infections are not in synchrony across the
world. Even as the UK and the US seem to have gained control over the third surge
of late, India is facing a second comeback of coronavirus. Japan is seeing a
renewal. Companies will have to prepared for supply chain distribution for a
long time. Second, the campaign to blunt the medical emergency is not running
smooth. Two provisional candidates were briefly suspended by the US and EU
regulators post-administration complications despite the affected being a tiny
fraction of the total sample. Eventually investigations ruled that the
protection offered outweighed any possible deviancy. An opposition campaign in India criticized the rush to introduce a
home-made vaccine, citing lack of clarity on the outcome of phase 3 trials. The concerns proved shallow as
subsequent studies pronounced not only its efficiency but also its potency to
fight newer strains. As such, a return to the pre-covid-19 job level will have
to wait. Third, the coverage is not consistent. The UK had vaccinated most of
those above 50 years, the most vulnerable group, by 15 April. In the US, 40% of
the population has received at least one jab. With hardly any major incident of
late, the Chinese seem to be in no hurry to get a security cover. India has
become the fastest country to inject more than 14 crore people above 45 years
in about three months. Region-specific travel bans will have to be in force
till confidence returns that airlines are not ferrying potential virus carriers.
The fourth
cause of uneasiness is the volatility in economy data and equity market indices
imparted by the rise and fall of new infections and the pace of immunization. Even
as the US is opening and the UK is gradually coming out of its three-month
lockdown, some EU members are again tightening restrictions. The varying severity
of curfews enforced by different Indian states to tame the latest fury will lead
to uneven factory and services output and GST collections. Investors moving
their cash and holdings as per the standard five- to seven-year bullish and
bearish cycles might be unable to take a long-term view on any sector. If tech
stocks go up on travel advise to stay away from hotspots, crude cools down but
so does activity in oil producing countries that are markets for a host of goods
and services. The fifth concern is the recklessness seeping into bets on the
unstated understanding among participants that a market meltdown like that on
23 March 2020 is unlikely. If at all there is bleeding, it will be quickly
staunched by fresh support packages. Liquidity pumping, incentives and cheap assistance
looking for value are propelling the unlikeliest of stocks into stars at the
first hint of turning of the corner. IPOs are sold for rich valuations. Prices
in the secondary market run ahead of earnings, anticipating return to the pre-covid-19
era, despite uncertainty when that will happen.
The sixth
outcome is the weakening of time-tested linkages guiding investors. Foreign
portfolio investors and domestic institutional investors, who should behave in
tandem, are staking out contrary positions. The mystery is if overseas funds are
withdrawing due to the country’s isolation on the international map following
the release of a new outbreak or on expectation of higher interest rates back
home. There is also no clarity if the net
buying by mutual funds over the last couple of months is because of correction or
on easing of redemption pressure. What is becoming clear is that the world is
no longer flat. The US and China are rebounding even as many countries in
Europe, Asia, and Africa continue to struggle. The seventh fallout is the increasing
flow of cash infusion from governments into an alternative swap system that runs
on sentiments rather than demand and supply. Already a legal tender in Japan, EV
maker Tesla, some major corporations in the US and Singapore have embraced digital
currency. Russia, China, and India are going to come out with their own
versions. A trading platform for cyber currencies recently got listed at
euphoric discounting. So far as transactions remained on the fringes, the
parallel universe could be ignored. The Old Economy's acceptance of the new reality
is a complication. Central banks can crack down on a market without rules to
insulate the real world or shepherd its transition to the mainstream to control
the narrative.
--Mohan Sule
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