Market crash | Reasons for the market crash: Does the Covid variable provide the impetus to take some leverage off the table?
What do you think of the correction occurring in the market? Markets need a reason and once there is any uncertainty, one can see that the first signs of leverage are being lowered from the market?
Obviously there was a risk of that as the markets looked a bit frothy, valuations were looking a bit stretched and we also have poor liquidity conditions as we are now in the month of December. But the truth is, the uncertainty around this variant found in South Africa has created clear concerns in the market as there is again uncertainty about the efficacy of the variant and whether the vaccines work against it.
What spooked the market was the fact that we really don’t have a lot of information on it, and the concern is that vaccines may or may not work against it, and that creates a lot of market risk aversion at this point in time.
Do you think the markets are overreacting or is it just the leverage trade that has been operating in the market? So far the markets haven’t given you any correction so this came as a surprise?
There is definitely an increased amount of leverage in the market and this is probably creating a bigger correction. But the correction wasn’t massive at this point. Obviously we’re seeing a rise in Treasuries, and we’re seeing the stock markets emerge. But we need to see more information but you are right in that there was a lot of leverage. Global markets have been fairly bullish in terms of the moves we have seen including Indian stocks and some correction is imminent.
The depth of the correction will now depend on how serious the variable really is. If it turns out not to be a major concern or a major concern, we will see another rally in the markets and a continuation of the uptrend in risky assets. But we will wait and see until scientists and experts investigate. We don’t really know the full amount of information to make that decision but we’re moving into the end of the year now and there could also be some profit taking on a lot of these risk assets. Some leverage may have been removed from the table and that may be the reason for this happening.
Given the correction in the markets, what should investors do?
The experience of the past two years shows that these corrections are being reversed, as we saw during the early days of the Covid crisis last year. The rise in risky assets in stocks has been dramatic in a very short period of time. But it’s a bit like catching a falling knife. One does not want to jump in when there is a lack of information and a lot of uncertainty about this alternative. We may not see buyers appear until there is more clarity. So I don’t think this will scare people indefinitely. Investors will still want to get back to better levels. Last year we also saw a lot of buying on dips.
But there are a number of headwinds here – the sheer amount of leverage and valuations and the fact that we’ve had poor liquidity now. So one has to keep in mind that all of these factors exacerbate some moves.