Markets Next Week: Omicron Virus Spread Could Cause Selling Pressure

The Omicron virus is now spreading and spreading fast. In the US, it has now reached 10 states and in India too results are awaited after 2 confirmed cases. States have already tightened measures. Certain cities and states have banned entry to malls and hotels as we write, unless a person has taken two doses of vaccine. If ban and travel restrictions begin on a more serious note, economic growth could be stunted all over again.

FIIs sell stocks worth Rs 39,900 crores in November

Stock market indices, the Nifty and the Sensex have lost more than 7% from their October highs. This has largely to do with sustained selling pressure from FIIs.

Foreign Institutional Investors have net sold in the cash market to the tune of Rs 39,900 crores, while domestic institutions have net bought to the tune of Rs 30,560 crores in November.

In the first 3 days of trading in December, FIIs net sold to the tune of Rs 7,000 crores in the cash market, while domestic institutions have net bought shares worth Rs 6,488.46 crores. FIIs have been selling stocks even before the outbreak of the omicron virus. Several of them including the likes of Blackrock and Goldman Sachs believe that the Indian markets are expensive as far as valuations are concerned.

Market volatility to continue

"Going ahead, market volatility is likely to continue given the uncertainty around the new Omicron variant and Fed tapering. Till clarity doesn't emerge over its rate of transmission, hospitalization needs, etc, news flows around it would keep markets unpredictable. On the other hand, investors would keep an eye on RBI's policy decision due next week wherein status quo is likely to be maintained amidst reappearance of Covid variant. However, the correction has made valuations comfortable and given the robust long term fundamentals, investors are recommended to indulge in value buying from time to time," says Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.

Avoid lumpsum investment and stay defensive

Emkay Global is already advising investors to add defensive. "In view of potential headwinds such as Covid/Omicron uncertainty, inflationary trends (supply issues, margin vs. volume trade-off), temporary softness in rural consumption, impending uptick in global/domestic bond yields, tapering by the Fed, and the strengthening dollar, we make tactical changes to our large-cap model portfolio to add more defensiveness," the brokerage has said.

Staggered buying in stocks is the best way to go in uncertain times. For example, should the markets fall 5% more from here, you could allocated more money and a further fall means further allocation and so on. Buying lumpsum is dangerous and fraught with risks.

Most analysts believe that the markets are over priced and hence one should avoid parking large sums of money.

One of the key events to be watched next week would be the RBI Monetary Policy Meet of Dec.

We expect the RBI to maintain the status quo on interest rates, even while maintaining a less hawkish tone, given the Omicron situation. A hike in the reverse repo rate is possible, though not entirely certain at the moment. In short, brace for market volatility in the coming days.