Omicron: Sectors to Buy and Avoid in 2022

For almost two years, pandemic developments have been the key driver for markets around the world.

It triggered a slump in 2020 and then a strong rally on the back of vaccination programmes, allowing an economic reopening.

Just when we were moving on, worries about the Omicron variant have now sent shockwaves through global stock markets.

The rapid spread of the Omicron variant of Covid-19 is now casting a shadow of uncertainty on the market outlook in the next few months.

The worst-case scenario would be if the mutation necessitates a return to lockdowns. This would threaten already strained supply chains and damage recovering demand.

Even if the virus were to disappear from our lives, that would likely define stock market direction, as there would be no further grounds for fiscal and monetary stimulus - two of the main drivers of last year's exuberance.

Let us take a look at how stocks of 6 major sectors in India were impacted, the last time lockdowns were imposed and if we can take some learnings from it to help us going forward.

We have picked up certain sectors and the top stocks in each one which were most impacted so that we can try and understand the threats and opportunities that lie before us this year.

1. Realty

The impact of the pandemic on the Indian real estate sector was stifling to the point that it brought property transactions to a near-halt when the nation went into a complete lockdown in 2020.

From halted construction activities to a mass exodus of migrant workers, the year 2020 was a watershed year in the history of economic downturns.

Negligible homebuyer enquiries, few site visits and incessant curbs on construction activities caught the real estate sector unawares.

The pandemic resulted in a serious liquidity crunch for real estate developers. The restricted movement and cautious buyer sentiment translated into an unprecedented increase in the unsold inventory as well.

In 2020, the pandemic triggered a freefall in real estate stocks and the BSE Realty Index lost over 40% of its value making it one of the worst affected sectors in the market.

Major real estate players such as Godrej Properties, DLF, Phoenix Mills, and Oberoi Realty were all down between 40-45% from their pre-covid levels.

Smaller companies like Sobha and Sunteck Realty lost over 58% over the same period.

However, since then, the companies have witnessed a sharp bounce back. From a low of just Rs 569, Godrej Properties has touched a high of over Rs 2,500, gaining over 340% since its pandemic lows.

DLF, Sunteck Realty and Oberoi Realty are up over 250% which is in line with the recovery in the BSE Realty Index.

As compared to these stellar returns, Phoenix Mills with a gain of 131% over its lows seems modest.

Finally, Sobha has been an outperformer with a return of 626% since its low of Rs 130 in March 2020.

This time around, developers and manufacturers are more positive since they are better prepared to handle the crisis. The current scenario might not be a concern for the large and medium-sized developers as much as it would be for smaller developers.

Experts feel the previous lockdowns changed consumer perception and home-buying became a priority.

The pandemic and lockdowns were a silver lining for the real estate sector, as property is a safe-haven tangible asset at the time of a crisis. This led to increased investment and home-buying over the last two years.

Large real estate companies were the biggest beneficiaries of the Covid fallout as they were able to increase their market share.

While it is too early to predict what the implications of the yet-evolving variant would be, the impact on the real estate sector will primarily be dependent on whether crippling lockdowns are once more imposed.

However, most developers expect the demand to remain robust and see a significant increase in revenues consistently in 2022.

2. Banking

When the Covid-19 lockdown was announced in March 2020, investors were worried about a severe fall in demand, lower incomes, and production shutdowns which could adversely affect the business of banks.

There were fears of staff shortages, inadequate digital maturity, and pressure on the existing infrastructure as banks scrambled to deal with the impact of Covid-19 on their operations.

This led to the BSE Banking Index crashing over 44% from its average pre-pandemic levels making it one of the worst affected sectors in the market.

Shares of IndusInd Bank tanked close to 72%, while Axis Bank wasn't much better off which plunged 55%

State Bank of India crashed close to 50%. ICICI Bank almost mirrored its benchmark index with a 44% fall.

Kotak Mahindra Bank and HDFC Bank were better off with their peers with losses of around 32% and 34% respectively.

However, contrary to several gloomy forecasts, the Indian banking sector was surprisingly resilient in the face of the pandemic.

Since the lows of May 2020, the BSE Banking Index has not only regained lost ground but in fact surged over 108% till date.

Remarkably, IndusInd bank which was the biggest loser had a fantastic run gaining over 300% at its highs. Since then, the stock is down but has still managed to close with 195% gains over the last 20 months.

State Bank of India has performed far better than its private counterparts and gained 205% as compared to 160% for ICICI Bank and around 124% for Axis Bank, and Bank of Baroda.

HDFC Bank and Kotak Mahindra have had a more subdued performance comparatively with gains of 93% and 63% respectively over the same period.

Although the Omicron variant remains a major challenge along with rising inflation going forward, the stronger balance sheets of banks with higher capital and liquidity buffers will help mitigate future shocks.

Most experts believe the Indian banking system is now prepared to withstand any new variant induced shocks.

Any impact should be lesser than during the second wave if we go by what's happening around the world where hospitalisations and deaths are still much lower as compared to the earlier waves.

Mild Omicron without paralysing and extended lockdowns will not have much impact on the banking sector.

However, a severe third wave could disrupt the onset of a new investment cycle in the economy.

Gross NPAs could reach as high as 9.5% by September 2022 from 6.9% in September 2021 as per the recent RBI report.

This of course puts investors in something of a conundrum as it is one of the only remaining sectors of reasonable value in a market full of stocks with extraordinarily inflated valuations.

3. Information Technology

IT companies performed relatively better as compared to other sectors in the initial months of the pandemic.

In fact, IT became the most prominent internal function in the aftermath of Covid-19, with business and other functions expecting IT services and support like never before.

The Nifty IT index touched its low of 11,180 a day before the nation-wide lockdown was announced and since then has only climbed higher gaining significantly. It is currently hovering at levels close to 39,000. That's a recovery of close to 250% since its lows.

Most of the large players such as Infosys, Wipro, L&T Infotech, Mindtree, and HCL Technologies mirrored the benchmark IT index with losses in the range of 30% to 35%.

Tech Mahindra and Oracle Financial Services were hit harder with losses over 40%. On the other hand, TCS proved its bellwether status by losing only 23%.

Since then, IT stocks have outperformed the broader markets.

Infosys, HCL Tech, Tech Mahindra have all gained over 250% from their lows.

Mindtree has had a fabulous run and is up over 600% since then. Other noteworthy gainers include Mphasis and L&T Infotech with gains in the range of 460%.

TCS however has had a subdued innings comparatively gaining close to 142% since its March 2020 lows.

From the past 2 lockdowns, we can determine that IT has truly become the backbone of business in the post Covid-19 period.

The momentum is expected to continue even in the face of the new variant primarily because companies tend to step up their tech spending to ensure business continuity.

Omicron may not have much impact as clients continue to invest in tech.

Further, during the previous lockdowns, IT majors had the ability to invest in technologies and gain market share. Being cash rich gives them the advantage to continue doing so and grabbing opportunities during any new crisis.

As companies continue spending in innovative capabilities, it will lead to the acceleration of IT services spending even if there are new curbs and restrictions imposed due to Omicron.

4. Automobile Sector

The Covid-19 pandemic introduced challenges that hurt demand and interfered with the automotive industry's deeply intertwined supply chains.

The reduction in consumer demand for passenger vehicles contributed to a loss in revenue and a severe liquidity crisis in the sector.

Auto stocks took a severe beating with the BSE Auto Index crashing close to 40% within the first days of the lockdown.

Market leader, Maruti Suzuki lost 39% whereas Tata Motors collapsed by almost 60%.

Mahindra & Mahindra (M&M) and Ashok Leyland were down by 47% and 56% respectively.

In the two-wheeler space, Hero MotoCorp and Bajaj Auto fared slightly better with losses in the range of 30-35%.

Since then, the recovery in auto stocks has been a mixed bag with Hero MotoCorp, Bajaj Auto, and Maruti Suzuki recovering their losses.

M&M and Ashok Leyland have gained over 200% since their March 2020 lows.

However, Tata Motors has gone berserk with gains of over 638% from its lows. Of course, that can be attributed to its EV story.

2022 may be a neutral year for automobile stocks as the rise of Omicron has once again created fear globally.

The industry expects a continuation of healthy demand along with easing of semiconductor supply issues during the year. Further, favourable government policies should provide a fresh impetus to the recovering industry.

On the other hand, due to rising commodity prices, vehicle price hikes will be inevitable and pose a challenge for sales in the medium term.

Vehicle price hikes may not fully cover the rising inflationary costs and could hurt the profitability of auto companies.

The Omicron variant of Covid and the shortage in semiconductor chips might decelerate the industry's recovery.

5. Pharma

When most sectors were brought to a halt due to the pandemic, the pharmaceutical industry was relatively resilient.

Pharma stocks were least affected as the industry was immediately categorised as essential services.

Hence, it experienced relatively lesser disruptions owing to the lockdown.

The BSE Healthcare index, after dropping to a low of 11,000 levels, quickly recovered and is up by 138% from its lows.

Pharma stocks were fairly insulated as compared to other sectors. Sun Pharma, Divi's Labs, Dr. Reddy's, and Cipla fell between 13% to 19%.

Cadila Healthcare was one of the most stable stocks, down only 11% compared to its peers.

It is not surprising that as the markets bounced back, four of the top 10 large cap stocks that generated stellar returns in 2020 belonged to the pharma sector.

Divi's Labs and Cadila Healthcare led the charge gaining close to 190%.

Similarly, Sun Pharma and Cipla also posted gains of over 160% from their lows.

Apollo Hospitals stood out by recovering over 400% since its March 2020 lows.

During the first few months of 2021, the sector corrected sharply but once again picked up momentum during the second round of lockdowns last year after which yet again most pharma stocks cooled down in the third quarter.

Amid the new variant, once again investors are expected to look back at pharma stocks.

Pharma stocks are looking good after a long period of underperformance where many stocks had corrected between 25-50% from their peak in 2021.

Experts are cautiously optimistic but if the Omicron variant starts the third lockdown, we might see pharma taking the lead like it did in the previous two waves.

Coincidentally, Sun Pharma is trading at close to its 5 years high already.

6. Metals

The nationwide lockdown imposed in the country severely disrupted economic activity, especially construction, which is the main end-user of metals produced in India.While the mining and metals sector was allowed to continue operations, shortage of workers was a big problem and most companies operated at 60%of capacity.

The BSE Metal Index crashed by close to 40%.

Jindal Steel & Power and Vedanta were worst hit dropping by 65% and 54% respectively.

Sail and Hindalco lost half their value whereas Tata Steel, Coal India, and NMDC were down approximately 39%.

However, since then, the index has not only outperformed the benchmark Nifty but also most of the other sectors.

The uptrend in the metal index was on the back of rising base metal prices amid increasing demand as the economy opened up after the lockdowns.

SAIL, Hindalco, Vedanta, and Jindal Steel have all rewarded investors with gains over 400% from their lows.

Tata Steel has also had a good run gaining 340% till 31 December .

Coal India however has been a laggard comparatively and is yet to cross its pre-covid levels.

Going forward, the demand-supply dynamics are favourable for metal stocks and that is likely to be supportive from a price perspective.

Further, over the past 18 months, there has been a significant amount of balance sheet deleveraging and debt reduction in these companies.

Hence, most companies seem to be in a better position in case of a third wave as compared to the 2020.

Volatile times ahead...

And with that we come to the end of our list today.

We may have a few cases in India right now but it's possible that it could get much worse...

So let's be cautious...the omicron strain is here to stay and no one really knows when the market is going to start pricing it in. It happened in 2020 and it could happen again.

Over the next few weeks, Omicron will play a major role in market direction. Sectors expected to perform well in these times are IT, Pharma, and FMCG.

However, expect volatility going forward as investors remain concerned about the overall impact of the Omicron form of coronavirus.

Do check out Brijesh Bhatia's latest video where he has discussed top 2 sector picks for 2022.

Last year, Brijesh had said his top sectoral pick for 2021 was metals and the sector went on to beat the Nifty handsomely. At one point, it was up 90% in 2021.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...