The Indian equity markets seem like they're heading downhill, still. It declined considerably last week while the Sensex has ended roughly 4% down since the past month. There have been mixed opinions by different analysts as to the reasons for this. Let's dive right into it.

Covid Variant

A Covid variant, by the name of Omicron, has been recently discovered and is increasingly seen in Honk Kong, Israel, and other European countries. It was first discovered in South Africa and is held responsible for the recent market crashes across the globe.

After the World Health Organization on Friday, 26 November, declared it as a "variant of concern", the equity markets across the world have gone for a toss. The Nikkei in Japan was down by 1.6%, and major US indices were also seen in the red, adding to the economic recovery tension that prevails. Further, the chief of popular biotech company Moderna said that its widely used Covid vaccine may not be as effective against the Omicron variant. As a result of that day, the Sensex lost over 1,300 points (about 2.2%) from its intraday high at 58,184.

This "highly transferable" variant has given enough reason to governments of certain countries to reinforce lockdown-like restrictions, especially in Europe. However, most analysts say that this is a hasty decision and investors are overreacting to the situation. The 2nd wave was absorbed well by the Indian markets and thus, it would be too early to form conclusions.

Concerns over the various lockdown enforcements and demand-side strains have turned foreign investors into net sellers in November; we have lost about 11,400 crores.

Sectors of the unlock theme like tourism, auto, banking, and realty witnessed the most selloff and investors have returned to defensive sectors like FMCG and IT.

An analyst of a reputed AMC also confirmed the tension in major supply chains, saying, “Crude prices too came under pressure as the Omicron variant being a cause of concern for expecting lockdowns, less demand, and supply issues."

Other Reasons

Some market experts believe that the virus variant is not the only one guilty here. Other quite likely reasons are:

• Overvaluation & Retail Investor Hype: Many of the companies have been trading at their all-time highs in the past few weeks. Recent economic recovery forecasts have led people to believe that this bull run will never end and people are buying the idea of extremely high valuations of market leaders as well as new-age startups. Profit booking by institutional investors was a much-anticipated event. Some of the new investors who started investing in recent times have appeared to be panic selling after noticing small selloffs from foreign & institutional investors.

• Foreign Capital Outflow: There are enough reasons for the selloff in equity markets across the globe. The inflation concerns as talked about in our previous blogs are spreading to countries outside the US too. Skyrocketing consumer indexes hint at slow economic recovery and is forcing investors to sell.

Source: PwC

Emerging markets like India are known to be extremely volatile and various concerns across the globe are making investors reduce their position size here, as is evident from the following info-graphic. The previous 2 months of October and November have witnessed a lot of foreign capital flowing out of India.

What you can expect

At least 25 of the 35 international equity strategists polled by Reuters said a correction in Indian equities is likely over the next six months. Insights from some major analysts conclude:

Sageraj Bariya, Vice-President-Institutional Sales at East India Securities:

Markets are likely to see a good bounce back and long-term investors should deploy capital. However, it is a bit early to conclude that the short-term market correction is over. Hence it’s advisable to stay away from trading.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said:

Even though the benchmark indices have fallen sharply, valuations have not become attractive and, therefore, investors may adopt a wait and watch approach.

So is it going to correct further or bounce back soon? Despite the innumerable probabilities and theories that exist to support both arguments, let's cut the noise and focus on the more important thing, i.e. what to do in this situation.

Conclusion: What you can do

1. Don't be greedy: The most rational step would be to review your short-term investments and swing trades. If you witness considerable selloff in the trades you had entered with a short time frame in mind, and your target has been it, exit before it's too late. Don't be greedy.

2. Think long term: India has a better than recovering economy currently. It has surpassed pre-Covid levels. This dip is the best time to buy those fundamentally sound stocks on your wish list. For the stocks you have already bought, lowering your average price by buying more now would be a good idea.

3. Other avenues: The red markets have turned our attention to alternative investments like gold, commodities, and even cryptocurrency, to some extent. Gold behaves inverse to equity prices and now would be a good time to buy some of these assets (of the correct size) to avail the benefits of diversification.