by Malvika Gurung
After setting record highs in a roller-coaster ride of a year largely dominated by bulls, Dalal Street has seen more volatile trading recently. High global inflation has led to foreign investors withdrawing money from India’s markets amid headwinds like the US Fed looking to accelerate tapering plans and hike interest rates three times next year. All this along with an uptick in Covid-19 cases and supply chain disruptions led to a bumpier finish to the year.
With that as a backdrop, here’s what can be expected from the Indian equity benchmark index Nifty 50 in 2022.
Overview of 2021
The calendar year 2021 has been nothing short of a bumper year for equities. Buoyed by positive market sentiment, liberal monetary policy, massive liquidity, lower interest rates, an uptick in economic recovery, and highly valued asset prices, the Indian benchmark equity indices rallied in 2021.
The Nifty 50 surged 23% and the BSE Sensex 21% on a YTD basis as of December 29th’s close. This even with a roughly 10% correction in the Sensex and the Nifty 50 from all-time highs on October 19th. The MSCI India Index grew 24.7% in USD terms, compared to a 4.9% gain for the MSCI AC Asia Pacific ex Japan index.
Despite the second wave of the pandemic in India, this year witnessed a strong gain in momentum, led by better-than-estimated macro recovery, increased vaccination drive, the government’s policy reforms encouraging investments, stronger-than-expected quarterly earnings results and a flurry of new listings. Indian markets also appeared to be less affected by the Delta variant than developed markets.
In its final meeting for the year, RBI (Reserve Bank of India) announced it would keep key rates like repo and reverse repo unchanged, in line with investor expectations. This contrasted with the US Federal Reserve, which announced plans to accelerate cutting back its pandemic-era bond purchases by March 2022 and indicated it would raise the interest rates three times next year to curb rising inflation.
This year was also marked by fluctuations in the money from Foreign Portfolio Investors (FPIs) flowing into the capital market. On the one hand, their net investments in domestic equities and debt instruments accounted for $3.8 billion in September 2021, the highest in 9 months. Major investments were made in the telecom, media, oil & gas and construction material stocks.
However, due to several headwinds over the past two months, the domestic market has witnessed a heavy outflow of foreign investment, with an almost 10% correction, due to surging Omicron cases in developed markets and rapid withdrawal of incentives from the US. As of November, there were five months of outflows, making this one of the weakest years for inflows in the last five.
2021 also witnessed a flurry in new public listings on the Indian exchanges at premium valuations, and that pace is now slowing as inflation and liquidity drainage enter the frame, setting the stage for a further market correction. The contrasting fortunes of Zomato Ltd (NS:ZOMT) (BO:ZOMT), which listed in July and popped 65%, and then went on to maintain those gains, and One 97 Communications Ltd (BO:PAYT) (NS:PAYT), the largest ever IPO in India, which fell 27% and then continued to drop towards the end of the year after listing in November, highlights this change in market behavior.
Outlook for 2022
Looking at the record highs and the standout year asset classes have had in 2021, analysts are bracing for more moderate performance in 2022.
Market experts peg the Indian economy to grow by 8-9% in the 2022-23 period. With the economy gradually moving towards pre-Covid levels, the economic outlook is an obvious positive for Dalal Street.
At the same time, major factors like the resurgence of Omicron-induced lockdowns and global monetary policy tightening may make it difficult for equities to recover recent losses or for flows to come into the Indian market until later in the year.
The question of valuation matters as well, and in that sense the recent correction might help reset the market perceptions, leading to a stronger 2022 for the Indian equity market, the Chairman of Motilal Oswal Financial Services Ltd (NS:MOFS) suggests.
Some experts believe that once the market reaches about 15% correction, FPIs will return to Indian equities in force given the buying opportunities. The return of FPIs and institutional money might spur the huge retail investor base in the domestic market to buy back into the market, supporting growth.
Market veterans and brokerages forecast Nifty to end 2022 in the range of 17,000 to 20,200 points, from the current 17,214-level, backed by a strong outlook of corporate earnings growth. Its EPS is estimated to have increased 15% annually from FY19-21, and going forward net profit margins on the Nifty50 are expected to be 16% in FY23E.
Macro Considerations: Inflation, Regional Investment
Global inflation will remain a threat. The US is witnessing its highest inflation figures in 40 years, with the CPI at 6.8%. UK inflation is at 5%, the highest in 10 years. Rising global inflation could cause knock-on effects in emerging markets like India. Indian equities are the most expensive in the APAC region, making them especially vulnerable to this effect.
Indian CPI for 2022 is estimated at 5.8% from 5.2% in 2021. The inflation could seep into the upcoming year and companies will have to choose between passing price hikes on to consumers or sacrificing margins.
However, despite the downsides of inflation, some strategists expect corporate earnings to improve over the next 6 months, led by a slow but growing economic trajectory. Moreover, analysts have yet to cut back their overall estimates on corporate earnings growth for Nifty 50 companies.
Due to a healthier fiscal and current account position, India is better-placed to counter global headwinds like accelerating inflation, hiccups in the pandemic recovery, and supply chain disruptions.
Furthermore, as the China Plus One global investment policy has started to pick up pace, along with buoyant start-up capital and IPO market, and an impressive private equity sector, India’s economic outlook should remain positive, with domestic demand continuing to be robust.
Whether valuations mean that Indian indices will first consolidate or pull back before rising again remains to be seen. However, in the long term, the factors driving India’s growth are trending well, which over time should be reflected in earnings and stock prices, as stated by an analyst at Federated Hermes.
Going forward, experts are overweight on the stocks of financials (including banking, financial services, and insurance), capital goods, FMCG (fast-moving consumer goods), real estate, and technology.
Read also: 2022: Threat of Recession Haunts Brazil
See our full 2022 outlook series here.