Nifty50: All eyes on new Covid variant as bears to patrol Dalal Street next week

MUMBAI: Domestic stock market is in for somber times next week as the emergence of a new variant of the coronavirus may potentially threaten the recovery of the global economy from the pandemic that will soon enter its third year.

The new variant that is rapidly spreading in South Africa and some other African countries has raised alarm bells as it has more than a high number of spike mutations that could make the current batch of vaccines less effective against the virus.

Already the European Union, the UK, Japan and a few more countries have banned direct flights from many Southern African countries to contain the spread of the variant in their countries till there is more information about its lethality.

The emergence of the new variant has spooked investors from Tokyo to New York. At home, the Nifty50 and BSE-Sensex cracked nearly 3 per cent each, their biggest fall in seven months. The sell-off has brought the benchmark indices close to their first technical correction since the bull market began in April 2020.

“This trend may take some time to recover as the WHO meeting on the new mutant variant impact and hospitalization rates in US and Europe will be watched by the market very closely,” said Amit Gupta, fund manager – PMS at ICICI Securities.

The sell-off in the market is likely exacerbated by the rich valuations that Indian equities were quoting before the emergence of the new Covid-19 variant. Over the past month, five foreign brokerages have downgraded their stance on Indian equities citing expensive valuations and better opportunities in other emerging markets.

Foreign portfolio investors are likely to drive the selling in Indian markets next week, too, given the general risk aversion towards high-risk emerging market equities and the steady rise in the US dollar index in the past few weeks.

FPIs have so far withdrawn more than Rs. 25,000 crore from the domestic secondary market in November so far and were net sellers to the tune of Rs. 13,000 crore in the previous month. “India has outperformed EM indices by a fair margin and it is natural for FIIs to scale back weightage to India. A time and price correction will be good to entice them back to India,” said Amit Kumar Gupta, portfolio advisor at Adroit Financial Services.

However, given the rising risk to the global economic growth, investors will keep a keen eye on central bankers at the US Fed and the Reserve Bank of India for any signs that they may extend their accommodative stance instead of continuing with the recent path towards normalization.

Bond yields in India rallied earlier today on the hope that the emergence of the new variant will delay any hike in reverse repo rate and repo rate by the central bank next month whereas, Fed funds futures showed that traders have pushed back the timing of the first rate hike to September from June 2022.

On the sectoral front, travel, hospitality, metals, banks and information technology companies were the worst performers this week. Analysts expect the cohort to remain under selling pressure till investors get clarity on the gravity of the new variant stalling the reopening of the global and domestic economy.

“Since the Nifty has slipped below the critical support zone of 17,150 points, the next crucial support comes at 16,700. Traders should continue with the bearish bias and use the bounce to create shorts. Investors, on the other hand, should see this as an opportunity and start accumulating quality stocks in a staggered manner,” said Ajit Mishra, vice president of research at Religare Broking.