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Though the markets ended in the green on Monday, investors were worried over uncertainties related to the new virulent strain of SARS-CoV-2 first detected in South Africa. Analysts expect volatility in equities to continue as the Omicron variant may disrupt economic recovery yet again.

On Monday, the BSE Sensex gained 153.43 points, or 0.27%, to end the day at 57,260.58. The Nifty rose 27.50 points, or 0.16%, to 17,053.95. “We expect the market to witness elevated volatility in the near term. While the impact of the new variant on hospitalization, and mortality remains unknown, and it is still undetected in India, we expect the elevated volatility to continue till more clarity and data emerge on this variant’s trajectory," Gautam Duggad, head of research, institutional equities, Motilal Oswal Financial Services Ltd, said.

Duggad expects sector rotations to continue, and defensives, such as pharma, IT and consumer, to make a comeback till sentiments improve. He said equity valuations, after a pullback, at 23.3 times based on FY22 Nifty earnings per share (EPS), are relatively more reasonable now.

After touching a record high on 18 October, the Nifty has corrected 8%, led by global factors such as the US Fed’s taper announcement, rising bond yields, higher crude oil prices, and strengthening of the US dollar Index. Despite corrections, India remains one of the top performers this year, with the Nifty up 21% in 2021, compared with the flattish performance of MSCI EM index.

On Monday, most markets in Asia-Pacific ended lower. The Nikkei in Japan declined 1.63%, Hong Kong’s Hang Seng index slipped 0.95% and South Korea’s Kospi fell 0.92%.

World Health Organization said the Omicron variant of the coronavirus poses a very high risk and uncertainties remain over how contagious and dangerous the strain is. According to Reuters, Japan on Monday said it would shut its borders to foreigners to prevent the spread of the Omicron, joining Israel in imposing the strictest border controls since its discovery in South Africa.

Foreign institutional investors have been gradually selling Indian equities since the end of November. They sold about $2 billion worth of Indian equities last week alone, raising concerns over a liquidity drain out.

Considering that India is the most expensive market in Asia, it suggests that a large part of the recovery has been priced in, said Credit Suisse. “We expect Indian equities to perform in line with Asian equities in 2022…The Indian economy appears to be recovering quickly with faster-than-expected relaxations as the covid-19 contagion ebbs. Conducive monetary policy has accelerated the economic and earnings recovery," it said in a note on 29 November.

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