Has Markets over-reacted to Omicron Covid variant?

Published On: Monday, November 29, 2021 | By:

Has Markets over-reacted to Omicron Covid variant?

Global equity markets, including India, have seen a sharp sell-off over the past few sessions as the Omicron Covid variant reignited concerns of sporadic lockdowns and limit movement of goods and people across key economies. Analysts, however, believe that the markets have overreacted to the development, and a market falls from here on, if any, should be used to add to positions from a medium-to-long-term perspective. The omicron variant was labeled a ‘variant of concern’ by the World Health Organization (WHO) last Friday that sent global equity markets into a tailspin. As a result, the BSE Sensex and Nifty tanked nearly 3 percent each in a broad-based sell-off.

"It may take weeks before enough information on the Omicron variant is available to know whether it is the major threat that markets seem to fear. Even if existing vaccines don't protect against it and it is more transmissible and virulent than other variants, we would not panic, as pharmaceutical companies have expressed confidence that they can re-engineer their vaccines to protect against it – so this does not mean we are going back to the dark days of 2020," wrote analysts from the global market strategist team at Invesco in a November 29 note.

"The global markets have overreacted without waiting for the scientific assessment of Omicron on rate of hospitalisation, death rates and efficacy of existing vaccines. There is a possibility of global equity markets stabilising in this week itself. Thanks to recent corrections, valuation of the domestic equity market has moderated. While trailing Sensex price-to-earnings (PE) has come down to 26.7 from its recent peak level of around 30, and the Nifty trades at reasonable valuation on forward earnings - at 23x FY22E and 20x FY23E earnings," he said.

As a portfolio strategy, those at Invesco suggest investors maintain current allocations, and view any continued sell-off as a buying opportunity. Though markets are unlikely to fall as much as in early 2020, the recent strong gains in cyclical assets suggest scope for a potential correction, they said.

"There is not much information available right now on the new strain for the markets to process; hence, we saw a pullback in the Indian markets on Monday. As things stand, the new Omicron variant is a double-edged sword. If it proves to be less impactful than the Delta variant, markets will stage a sharp recovery. In that case, it may be advisable to buy the dips," said U R Bhat, co-founder and director, Alphaniti Fintech.

Among sectors, the biggest negative impact of the Omicron variant over the next few sessions, experts say, will likely be in assets such as industrial commodities, equities and real estate. Information technology (IT), healthcare and utilities, however, are likely to remain relatively insulated.

Given that Europe was already in the midst of a new Covid wave and lockdowns, and the fact a lot of the discoveries of the new variant are in Europe, European equities could be among the worst performers.

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