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Ventura Wealth Clients
4 min Read
Dream 11

Markets across the world have witnessed sharp sell-offs ever since the news of Omicron, a new variant of coronavirus, has broken loose. But don’t you think markets were just waiting for a profit-booking opportunity, given the parabolic rise from the March 2020 lows?

Will this free-fall continue or will markets recover as fast as they slipped? Most of us have a tendency to overreact to market swings. To avoid this mistake we should first set the context right.

This short article is for you if you are wondering whether you should take advantage of the market weakness to scoop up stocks or refrain from investing.

The first wave was the most damaging one for the markets, going purely by the movement of leading indices. There was a lot of uncertainty regarding managing the healthcare crisis and business operations under lockdowns.

The second wave, despite being harsh on India, didn’t do as much damage to the markets as the first wave did in the initial phases. Businesses found out ways to cope with the new-normal.

However, high inflation in raw material prices, shortages of some key inputs, higher energy costs and skyrocketing freight costs dented profit margins of India Inc in Q2FY22.

What damage could the potential third wave do to Indian markets?

A dramatic sell-off in the last week suggests that the markets are worried about two important factors—economic growth and corporate profitability.

Last week, we discussed with you how stagflationary scenarios have been historically most prevalent in the world’s largest economy, the US.

If the Omicron-inflicted fresh wave drags the global GDP, stagflation—i.e. decelerating growth and rising inflation—might become a real threat to markets again. 

Why would inflation rise?

Well, the restoration of supply-chains is likely to get further delayed if Omicron forces governments to impose fresh curbs on the movement of people and goods—a phenomenon that resulted in rising raw material prices during the first and second wave.

We have already seen some developed nations imposing travel restrictions.

Which businesses might possibly feel the heat?

  • Those depending on imports of key raw materials
  • Those following just-in-time inventory management practices
  • Companies that can’t hike prices without losing market share (B2B as well as B2C)
  • Companies having large export orders since any delay in delivering goods can affect realizations
  • Contact-intensive industries such as hospitality

Only time can tell how the pandemic and its fallouts will unfold, going forward. Fortunately India has administered 121 crore vaccine doses already. Therefore, reading too much into the Omicron threat would be no more than speculation at this moment, at least from the stock market perspective.

So should you take advantage of the market weakness?

You may take advantage of market weakness for portfolio balancing.

Challenging market conditions might test overheated stocks, which look expensive even on their FY24 estimated earnings as compared to their historical averages.

And any prolong pause may test the patience of investors of newly listed loss-making start-ups which now feature amongst some of the most expensive counters in Indian markets.

It remains crucial to see if investors take a relook at FMCG businesses, which have been out of favour for the past 12-15 months owing to high valuations and rising inflation.

Will they make a comeback? The key is to find bargains.

Evaluating FMCG companies based on only Price-to-Earnings (P/E) multiples may not be an appropriate way to finding value in them. Let’s not forget besides IT, FMCG companies have been generating free-cash flows consistently.

We recently wrote about the value theme, highlighting a possible turnaround in the investors’ perception. You might also want to take a fresh look at value investing, given that markets have been volatile.

If the risk-off trade persists, it will be equally crucial to see if gold becomes a popular asset class again given the potential stagflationary scenario that may emerge. On the back of expected regulation of cryptocurrencies in India, risk-off trade might test the strength of cryptocurrencies such as Bitcoin.

In a nutshell…

  • There is no need to overreact to extreme market swings
  • Look at them as opportunities and not hurdles
  • Rebalancing your portfolio would be an intelligent approach
  • You might want to look at the value theme more seriously and starting a new SIP in a value fund could be a good idea at this juncture
  • If markets are to drive on tough terrain, it’s crucial to look at companies generating free-cash flows

We reiterate, it’s time to be careful not fearful.

You may also like to read: Are chemical stocks a good buy at this juncture?


Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock.

Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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