The recovery in the market in the second half of the trading session on Tuesday shows investors are not unduly worried about the developments in the UK around new variant of COVID-19. In fact, they see any correction in the market as an opportunity to buy on dips, taking the indices back up north, say experts. However, a fall beyond 6-7 per cent may trigger panic among first-time investors.
"The new variant of COVID-19 seems to have dented that sentiment but it's too early to say whether it's the beginning of a major correction. As long as the markets do not correct beyond 6 per cent, the Robinhood investors will see every correction as an opportunity to buy, thus resulting in a bounce-back. A fall beyond 6-7% may be psychologically damaging for such investors who have never witnessed a fall - thus creating a sense of panic," says independent market expert Ambareesh Baliga.
The Sensex, after a sudden bloodbath on Dalal Street on Monday, reclaimed its crucial 46,000-mark on Tuesday. The 30-share index recovered by 452.73 points to end at 46,006.69 after plunging 1,406.73 points or 3 per cent in the previous day. In a volatile trading session, the recovery happened only at the fag end of the session thanks to a strong buying in IT and pharma stocks as investors preferred safer counters. HCL Tech, Tech Mahindra, Infosys and Sun Pharma were among top gainers, while Kotak Mahindra Bank, Tata Motors and Hindalco were laggards.
What should you do?
There is no denying that markets are overbought, going by various valuation metrics. "The 50-stock Nifty index is currently trading at a one-year forward price-to-earnings multiple of nearly 27 times compared with its 10-year average of 17.3 times. The Nifty50 is also trading two standard deviations above its historical average. India's market cap to GDP ratio is at 91-plus versus the average of 75. That said, asset allocation review may be required to bring down the value of equities to the desired levels over the next few weeks," says Deepak Jasani- Head of Retail Research at HDFC Securities.
Baliga believes a gush of liquidity feeding on itself has provided limitless momentum to the equities so far, but caution is the need of the hour. "I would advise investors to continue booking out and remaining in cash for a while as liquidity has created an illusion that all is well," says Baliga.
Going forward, investors must focus on quality names with decent margins of safety. "Broad-based rally in the markets looks difficult hereon considering rich valuations and threat on earnings from rising input costs and possible disruption in demand due to fresh restrictions in various countries," says Binod Modi, Head Strategy at Reliance Securities.