How will the stock market react to the 3rd wave ?

The initial hit of covid 19 in India has so far failed to spark a deep stock selloff like before. Although surprisingly muted stock market reaction to india’s virus disaster can also be seen in net outflow of foreign investors, they turned net buyers of india equites after four straight weeks of outflow-since the lockdown measures being implemented by the government has prevented a slide in the economic activity, but the risk of 3rd wave was that the latest surge in covid cases may prompt a sharp escalation in restriction again.

The speculation of the effect of stock market in the 3rd wave is to be stable, economists suggest. However, expectations that Asia’s third largest economy wont take as big of a hit as last year have also been reflected in rupee, which recouped most of the last month’s decline. Normally, India follows their lead but it mantained a relatively stable stance mid week as the worst affected industries actually recovered in July despite the 3rd wave. July retail sales were 72%, 61% more travellers took to the skies compared to june, and the hospitality industry witnesses higher occupancy.

While markets have a tendency to advance, a single piece of bad news may create a downturn with double the ferocity, wiping out the investors wealth in an instant. Hence, market participants must not underestimate markets and keep in mind that there are risks of a third wave. Nifty has been outperforming major developed and emerging marlet indices,a shooting star candle hits at a mild retracement towards the shirt term averages. There could be a dip they suggest. Betting on quality stocks remains the key at this juncture and the best way to minimise risk is to play a mix of defesiveand economy driven stocks.In defensive it is ideal to have a highermix of market oriented businesses. Markets are anticipated to remain buoyant in the coming week owing to a spate of encouraging July recovery signs. Furthermore, investors may use the monthly expiry rollover data to evaluate momentum and predict if markets will continue their march to fresh highs in September. Moreover, the GDP data for the United States might also impact market sentiment globally. Investors are encouraged to choose only stocks that are fundamentally sound.

-Altaf