Covid 2.0 and markets: Why India market may not gasp for O2 because of 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 domain in these times, and as always, is the capital markets. Could there be a repeat of March 2020 when our markets had tanked 37%? Is it a reason to worry?

While looming gloomy shadow of many unknowns is natural, there are quite a few positives this time, because there are more things known in this wave compared with Wave 1. Also, Wave 2 is not necessarily comparable with Wave 1.

First of all, Wave 2 is primarily just an Indian phenomenon. Reflecting on the Wave 1 situation, it was overwhelming because of its suddenness and it being a global outbreak – country after country got impacted by this. As a result, global markets were in turmoil and India also had its fair share of it.

This time, so far, it is only 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 were introduced and implemented to boost economic activity and hasten economic recovery, both globally as well as in India. Globally, significant liquidity was pumped in and that money remains in the system today. Also, the subventions granted by governments in various countries, including India, helped people tide over the financial stress and continue to have their impact in these times.

Further, consumers around the world have stockpiled an extra $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.

Thirdly, the regulators and the policy makers this time around are not caught in an unprecedented situation. They have been there last year, tried various measures and tasted success. They are alert and active – ready to move swiftly wherever corrective action may be required.

Finally, despite the rapid growth of the virus and the worsening situation, we do not expect a severe lockdown like last year. Governments, at in states and at the Centre, are cognizant of the economic cost of a complete shutdown and would take calculated measures to ensure that economic activity continued.

Of course, some words of caution are required. One must be mindful that:

• If the current crisis continues unabated and becomes truly unmanageable, we can expect a stricter lockdown like last year. This would certainly be detrimental for the economy and economic recovery. Today’s highly virus-impacted areas like Maharashtra, Gujarat, Delhi and Karnataka are also high economic growth propellers of the country. If these areas were to go into a lockdown, that can potentially cripple the economy.

• Even if the government does not impose a stringent lockdown, excessive fear of the virus spread itself can force people into a self-imposed lockdown kind of situation, again impacting the economy. People, being extremely careful and fearful, may not return to work soon – we are just coming out of a major downturn, and this can elongate the recovery period.
• As our government had significantly loosened the purse string last year, availability of resources to take care of future eventualities will be limited. The government deficit may also expand as tax and non-tax revenue collection may not be on target and there will be limited headroom for the government to manage the expenditure. This could lead to an upward tick on interest rates, impacting the market.
• The current market levels have built in expectations of a significant economic turnaround and good corporate performance, which may not be a reality anytime soon. In such a situation, a downward revision of estimates could lead to a market correction.

A simple two-fold solution can do the magic.

First of all, ensuring that pandemic safety protocol is followed by every Indian. Unfortunately, once the lockdown was lifted in India, we totally let our guard down between Diwali and Holi. To beat the current renewed crisis, lockdown is not a permanent solution, protocol is. Lockdown was a temporary measure to get breathing time to break the virus chain and put our house in order.

Secondly, government finances should be managed with prudence and rigor. Any slippage in government deficit may adversely impact the markets.

In summary, what can fuel a quick rebound hope for the market 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 lose even one minute of market operation and it is very likely to be the same case this time too. In the short term, markets may see volatility, but overall it may not gasp for O2 and should remain in good health!