New coronavirus variant wreaks havoc in markets, FPIs accelerate selling

The discovery of a new coronavirus variant rattled equity markets on Friday, which were already reeling from pressure due to concerns over stretched valuations and monetary policy normalisation.

The Sensex fell 1,688 points, or 2.8 per cent, to end the session at 57,107, while the Nifty tumbled 510 points, or 2.9 per cent, to close at 17,026 -- the worst fall for both the indices since April 12. This was also the second straight week when the benchmark indices fell around 2 per cent, a signal that the market has moved into treacherous waters, away from the relative calm seen during the most part of the past one year. The Sensex is now down 4,659 points, or 7.54 per cent, from its record high of 61,766 on October 18.

The India Vix, a gauge for market volatility, surged 25 per cent to end at 20.8. The volatility wiped out Rs 7.4 trillion of investor wealth on Friday, and close to Rs 11 trillion during the week. This week foreign portfolio investors (FPIs) have accelerated their selling. On Friday, they sold shares worth Rs 5,786 crore. In the preceding four sessions, they had dumped shares worth over Rs 17,000 crore.

Global stock markets also sold off sharply. The Dow Jones Industrial Average was down 2.53 per cent at 34,898 in early trading, tracking its worst day since late October 2020. The S&P 500 was down 1.83 per cent at 4,615.

According to news reports, the B1.1.529 strain detected in South Africa had mutations with higher transmissibility and the ability to evade vaccine defences. Analysts said the new variant of coronavirus and its potential to resist vaccines had left investors worried that it could put countries' health systems under stress again, lead to fresh lockdowns, and threaten the global economic recovery. Further, it could put the central banks considering tapering of bond purchases and raising interest rates in a fix.

“Reports of the new variant’s vaccine resistance have spooked investors. If the existing vaccines don't work, we are back to March 2020 again. The spread of the delta variant has put Europe on a sticky wicket, and a new variant that is more potent can make things worse,” said U R Bhat, co-founder and director, Alphaniti Fintech. “The established wisdom was that we are well on the way to recovery. Inflation has also gone up, so tapering and interest rate hikes should start. But all these tenets have been turned on its head now and have made things more complicated.”

Investors on Friday dumped stocks in the realty and metal sectors, which have done well this year. They moved to the relative safety of healthcare stocks. Stocks linked to travel also saw a huge sell-off.

Some countries have imposed travel restrictions on South Africa. The UK has imposed a temporary ban on flights from six African countries, while Singapore has announced restrictions on people who have been to South Africa and nearby countries in the past fortnight. India has tightened the screening of incoming visitors from South Africa, Botswana, and Hong Kong. The surge in Covid cases in South Africa has been attributed to the new variant.

Most global markets have stumbled this week, with India being the worst-performing major market.

“There is fear of this new variant spreading to other countries which might again derail the global economy. Already, there is uncertainty as to when the US Fed will start raising interest rates. So markets might continue to reel under pressure and would actively track the coronavirus situation globally,” said Hemang Jani, head of equity strategy, Motilal Oswal Financial.

Concerns over stretched valuations of stocks have also made investors take money off the table. Last month, many foreign brokerages had raised concerns about the valuations and downgraded them.

Since March 2020 lows and so far this year, the rally in the Indian markets had been the best globally. However, experts predict emerging market peers such as China, Brazil and Indonesia to perform better from here as their valuations are relatively attractive and corporate earnings growth far superior.

The market breadth was weak, with 2,290 stocks declining and 1,023 advancing. All Sensex components barring four declined. IndusInd Bank fell the most at 6 per cent. Just three stocks — Reliance Industries, HDFC and ICICI Bank — brought the Sensex down by 630 points.

With agency inputs