market outlook: D-Street keeps Covid blues at bay, but upside may remain capped in near term

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MUMBAI: With benchmark equity indices rising for the third successive week, the longest such streak since January, signs are emerging that investor concerns over the second Covid-19 wave are steadily receding, said analysts.

The sentiment is borne out by the fact that India VIX, also known as the fear gauge, nosedived 10 per cent during the week and nearly reversed the 11 per cent surge seen in April.

The buying momentum seen this week in shares of metals, corporate loan-focused banks, state-owned banks and the outperformance of smallcap stocks further indicated that risk appetite of investors remained strong.

The tentative optimism in the market is being buttressed by mathematical models that suggest that the peak of the current wave, which has devastated the country, may come by the end of this month. Global rating agency S&P Global Ratings, earlier this week, said that if cases do peak in May then the impact on the economy will be fairly limited.

“These are fairly temporary shocks. People are withholding consumption, but eventually, they are going to come back and start spending money,” Vishrut Rana of S&P Global Ratings told ETNow.

The sentiment was echoed by India’s largest two-wheeler manufacturer Hero MotoCorp, who is counting on the ongoing lockdown to be restricted to the June quarter. “We expect normalcy to kick-in from the second quarter with a likely slowdown in Covid-19 cases and higher vaccination levels,” said Niranjan Gupta, chief financial officer at Hero MotoCorp post the company’s March quarter earnings announced on Thursday.

Housing Development Finance Corp, too, reflected this guarded optimism in its post-earnings conference call today. The company’s Chief Executive Officer Keki Mistry said that disbursements in April were already higher than all of June quarter last year and that bottlenecks to business are not as severe as was the case during the national lockdown.

With India Inc’s commentary less fearful than what was expected, investors are less concerned of a washout quarter for earnings in the three-month period ending June. “The second wave is a bit concerning, but from an economic standpoint, we have not seen a big impact on earnings. By and large, I am not as negative on markets. If there is a big fall, it is a buying opportunity,” Abhiram Eleswarapu, Head of Equities, BNP Paribas Securities India told ETNow.

That said, investors are not fully convinced that the benchmark indices are in a position to make a dash towards their lifetime highs hit in mid-February. Positioning in the options contracts of the Nifty50 showed limited appetite among traders to buy strike prices beyond 15,000 level.

“We feel improvement in the domestic Covid situation is critical for any sustainable up move; else the rebound may again fizzle out in the following sessions. Traders shouldn’t go overboard in the current scenario,” said Ajit Mishra, vice president of research at Religare Broking in a note.

That said, investors will shift their gaze from the still-rising curve of the new Covid cases towards the plateauing curve of daily vaccinations in the country.

“Honestly we are a bit in the dark on how long it will take to get the vaccination numbers up to 5 million a day. If we mess this up and if we cannot give 5 million vaccines a day in a month or so, I think we will have pressure on the stock market,” said Saurabh Mukherjea, founder and chief investment officer at Marcellus Investment Managers.

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