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Market Strategy: OMICRON drives a pullback; Volatility to continue; defensives may see greater acceptance.

* The Nifty ended its six-month winning streak in Nov’21, ending ~4%, or 688 points, lower at 16,983. Nov’21 was characterized by elevated volatility, with the benchmark oscillating in a wide range (~1,400 points) and pulling back ~8% from record highs of Oct’21.

* Much of the market anxiety can be attributed to global factors (Fed’s taper announcement, rising bond yields, higher crude oil prices, and strengthening of the US Dollar Index). A big fundraise in the primary market also put some pressure on the secondary market. Sentiments were also battered across global equity markets on 26th Nov’21 with the detection of a new COVID-19 variant – Omicron – in South Africa.

* FIIs sold almost Rs40k crore in the month of November – highest since March’20 (which saw Rs57k crore outflow). However, in the primary market, FIIs invested over Rs27k crore during the month. Nov’21 saw the highest inflows by DIIs since Mar’20 at Rs30k crore.

* Otherwise, macroeconomic trends continue to see good recovery, with high-frequency indicators improving month on month. GDP for the September quarter reached pre-covid levels at 8.4% YoY. GST collections on the other hand, jumped to over Rs 1.31 lakh crore in November, the second highest since its implementation in July’17.

* COVID-19 cases continue to remain under control so far, despite the festive season. The decline in active cases has led to an increase in economic activity and mobility.

* While the new variant – Omicron – adds to the uncertainty, we expect further clarity to emerge in the next few weeks as additional data comes out. Till that time, we expect defensives like Pharma, IT, and Consumer to make a comeback.

* Equity valuations, after the pullback, at 23.3x/19.4x FY22E/FY23E Nifty EPS are relatively reasonable now. Hence we would recommend investors to buy in this volatility in staggered manner.

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