Stock Markets Plunge, but for Reasons Beyond Omicron

The market plunge in the last few days has been quite stark, but the markets have been gradually falling for the last 2 months. Actually, in closing terms, the Nifty peaked on 18-October at a level of 18,477 levels. As on 20-December mid-day, the Nifty is at 16,417.

That is a full 11.15% fall from the peak. One can argue that such a fall is understandable after a 141% rally in the indices since March 2020, but the reasons this time are numerous.
 

What led to the stock market correction?

The fall may look sharp because the value loss from the top has been rapid and with extreme volatility. But what exactly has led to the plunge in the markets?

a) The rapid spread of the Omicron virus is definitely an issue. It is still to attain alarming levels in India but countries like UK, Germany, Netherlands etc are already evaluating total lockdowns, due to their large African migrant populations. In India, the casualties are still fairly low, but any disruption from the West would impact travel and commerce.

b) Perhaps, the more immediate concern is the Fed hawkishness. The Fed threw a surprise in its 15-Dec policy statement promising to double the taper and complete the liquidity clampdown by March 2022. It also hinted that rate hikes in the US could start immediately after the taper was completed. That opens the doors to 4 hikes in 2022.

c) Then there is the real problem of inflation; both global and local. In India, CPI inflation has been at 4.91% but more worrying is the WPI inflation at 14.23%. It looks like supply chain constraints are here to stay. Even the US inflation hints at 6.8% is intimidating and opens the doors for a series of rate hikes. RBI may have to follow suit.

d) Finally, there is the more real issue of valuations. In December, it is only India that is seeing outflows among emerging markets. Oher Asian EMs like Taiwan, South Korea and Thailand are getting consistent inflows. Clearly, it is not just a risk-off story at play but also a valuation story that is not exactly working for India at these levels.

What should investors do?

Till the second quarter, the corporate numbers have been extremely solid and Q3 is expected to continue this trend. At best, this looks like a breather for the market to regain a degree of normalcy and a semblance of sanity. That is really not so bad, after all.