Sensex navigates geopolitical swirls to outperform global peers in ‘year of poly crisis’
After a two-year liquidity-driven bull run, the BSE Sensex faced its moment of reckoning in 2022 as Russia marched into Ukraine, the US Federal Reserve unleashed all weapons in its war on inflation and catastrophized global financial markets flooded.
The aftershocks of the COVID-19 pandemic combined with geopolitical upheavals, a supply shock in energy markets and a synchronized tightening of monetary policy by central banks around the world sent the global economy into a perpetual tangle of ‘polycrisis’.
But the staunch confidence of domestic investors kept Dalal Street relatively unscathed and Indian benchmarks brushed off the gloomy signals with aplomb.
After having a lackluster period for most of the year, Sensex started to gain momentum as the holiday season approached. It closed on December 1 at its all-time high of 63,284.19.
However, hopes of a year-end Christmas rally were dashed as rising COVID cases in China fueled fears of a global pandemic wave, sending bulls scrambling for cover.
The Sensex is up just 1.12 percent year-to-date (to December 25), but is still the world’s best performing major market index.
In fact, none of the major global indices have managed to post gains in this brutal year, including the Dow Jones (down -9.24 percent in 2022 so far), FTSE 100 (down -0.43 percent), Nikkei (down -10.47 percent down), Hang Seng (loss 15.82 percent) and the Shanghai Composite Index (loss 16.15 percent).
Much of the credit for this relative outperformance goes to domestic retail and institutional investors, who, despite the steady drumbeat of negative headlines, kept their faith and absorbed the record sell-off by foreign funds.
Compare this to the panic of the 2008 global financial crisis, when the Sensex had collapsed by more than 50 percent as FIIs hit the exit button. Foreign institutional investors (FIIs) have raised a record Rs 1.21 lakh crore from Indian equities so far in 2022, in line with US Fed rate hikes that have led to an exodus from emerging markets including India.
Domestic investors, on the other hand, showed the sharp instincts of market veterans and resolutely bought the dip.
The retail investors’ share of NSE listed companies reached an all-time high of 7.42 percent (approximately Rs 19 lakh crore) on March 31, 2022.
Mutual fund investments through the systematic investment plans or the SIP route have also been on an upward trend despite market swings, reaching an all-time high of Rs 13,306 crore (both equity and debt segments) in November.
This pushed the Assets Under Management (AUM) of the 43-player MF industry to a lifetime high of Rs 40.49 lakh crore at the end of November.
India’s robust fundamentals and strong business performance at a time when the global economy teetered on the brink of recession provided another tailwind for equities.
“GST collection stood above Rs 1.4 lakh crore for the eighth consecutive month in November, while e-way bill generation has remained above 7 crore since March 2022. Other economic indicators such as GDP and PMI also recovered well after the pandemic,” said Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services.
“The driving force behind India’s outperformance was strong corporate profit growth of 24 percent CAGR in FY20-22, as well as an increase in central government capex, which revitalized the Indian economy after the COVID-induced slump” he added.
While many investors benefited from these feel-good factors, there were quite a few who only received invaluable lessons.
One of those lessons was that stories are no substitute for cash flows, as evidenced by a host of new-age technology companies emerging as the biggest wealth destroyers of 2022.
After the explosive IPOs of Paytm and Zomato last year, heralded as the coming of age of Indian startups, companies like Delhivery and Tracxn made their market debut in 2022. They all trade anywhere from 15 to 70 percent below their listing price, making thousands of crores of investor capital were wiped out.
Paytm even earned the dubious distinction of being the world’s worst-performing large IPO in a decade.
Businesses that seemed “disruptive” or “innovative” when credit was cheap and plentiful suddenly turned into money-consuming liabilities when interest rates soared.
The collapse of Big Tech in the US, where Alphabet, Amazon, Meta and other tech titans lost a whopping $5.6 trillion in market cap, reverberated through global markets and pierced valuations and investor egos alike.
At home, even established big names struggle to justify high valuations in the face of a challenging business climate.
Market heavyweights HDFC and HDFC Bank were up 10 percent on April 4 after announcing the largest merger in Indian corporate history, but the rally quickly petered out as the initial euphoria wore off.
The same was the case with LIC, which listed in May this year after the country’s largest IPO of Rs 20,557 crore, but has been chronically underperforming and has yet to reach its issue price.
The eclipse of the global macroeconomic outlook can be traced back to the gauge of global financial market sentiment – the US Federal Reserve.
The US central bank has raised interest rates seven times this year, from zero in early 2022 to 4.25-4.50 percent now. Fed Chairman Jerome Powell reiterated that the battle against decades of high inflation is not yet over, sending shivers down the spines of participants betting on interest rates approaching their peak this year.
The RBI has also tightened policy, raising the repo rate by a total of 225 basis points in five tranches to 6.25% since May, in a bid to cool the price rise. Although Indian retail inflation fell below the RBI’s upper limit of 6 percent in November for the first time this year, there is still a long way to go.
“Prudent monetary policy is expected to continue in the first half of 2023, and India’s broad valuation remains at premium levels, which is the hurdle in the short to medium term.
India’s valuation will fall to a long-term average due to shuffling by foreign investors and a slowdown in domestic earnings growth.
“We can expect modest positive average returns in 2023 depending on the performance of developed and other emerging markets. India, which is a key part of emerging markets, will benefit, although we may underperform on a comparable basis,” said Vinod Nair, Head of Research at Geojit Financial Services.
For investors beset by one global turmoil after another, these may be some much-needed words of comfort.
(Except for the headline, this story has not been edited by DailyExpertNews staff and is being published from a syndicated feed.)
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