Riding the Tide of The Covid-19 Second Wave

by Sonam Srivastava

Published On April 23, 2021

In this article

Tensions are mounting. As the world is fighting the second wave of Covid19, India is fighting it with several states at the same time. With Health Workers working around the clock and hospitals left with no beds to accommodate new cases, it seems to be a very tough time indeed. But how does this translate to conditions of the Indian Financial Markets? smallcase recently sat down with us to ask a few questions on riding the second wave of Covid19. Here’s how the conversation went down.

Q.1 The second wave of the Coronavirus is taking place at different timings around the world. What does this mean for the Indian financial markets? Is this worrisome or a blessing in disguise?

What's happening with the second wave of covid is terrible, to say the least, but having seen the toll that the first wave took, we are better prepared. The focus has shifted from lockdowns to vaccines which makes sense. Looking at the markets though, I have mixed feelings. Just before the second wave we were assuming that the recovery is done and dusted and the rate hikes could come sooner and derail equities, but the second wave sort of eases the fear of rate hikes. On the other hand, the second wave would dampen earnings & sentiment for the short term atleast and we will see the market lose some strength.

Q.2 It seems that lockdowns cause the markets to fail. But at the same time lockdowns can reduce the number of cases and deaths. Are we in a loop here? What should we do with our money?

There's no models that seem to work in a covid wave. There is going to be short term pain in the market and being conservative might be reasonable. The way the virus is spreading, lockdowns seem like an urgent solution, but for a healthy economy, increased vaccination is the only long term solution. At Wright we deallocated a little bit away from cyclical stocks to gold, liquid ETFs and increased our nasdaq exposure for the short term. We haven't shifted from cyclical to defensive stocks yet as we believe in the long term growth story of the Indian economy, but the volatility in the immediate term is real!

Q.3 Let’s move to a sector wise analysis. With the coronavirus pandemic throttling closer, what does it look like for the infrastructure sector? And its impact on metals which seemed to have a good run last year.

What does the pharmaceutical industry currently look like? We noticed that it had a certain dip but now with the Second Wave approaching, how would it impact the industry?

Defensive sectors like Pharma & IT have made a comeback in the past few weeks while Banks, Auto, Infra is in a downtrend since March. Metal stocks are still going strong riding the commodity wave. In the fear based decline of the covid second wave Pharma has been the strongest and defensive sectors have had a lower decline than the cyclicals. Pharma did well in the last covid wave and it also falls right into the value and defensive bucket which is showing a recovery.

Q.4 And finally what would your smallcase strategy be to ride this wave? Any specific stock/stocks exist in your smallcase that helps you achieve this? Or a rebalance that you’re planning to do for this?

We did rebalance our multi factor portfolio in the middle of April, we deallocated a little bit away from cyclical stocks to gold, liquid ETFs and increased our nasdaq exposure for the short term. We might look at increasing allocation to value stocks and defensive names if the situation does not improve for the cyclical growth story, but given the projections of growth by IMF and good performance in the last quarter, we are optimistic in the long term. We hope that the second wave of the pandemic has only a short term impact but you never know.

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