Two factors, an easy money policy and strong inflows from both FIIs and retail investors, fueled strong equity performance in 2020 and 2021. However, this will change in 2022, leading to a moderation in returns. Quantitative easing measures have been tightened and actions will be strengthened in 2022. This will affect the influx of FIIs in emerging markets such as India in the near term. In addition, FIIs are cautious about the Indian market due to its high valuations.
Rise of private investors, was a global phenomenon, led by fiscal family policy, rise of low-cost and research-backed platforms, jump in secondary and primary market. It usually happens because the secondary and primary market is making profits. However, we must recognize the timing and scope of retail investors to buy stocks with such passion after the global sell-off of 2020. It is a progressive lesson from the long-term investment pattern, such as taking input from the global financial crisis of 2008 and the market performance after the event. In general, moderation in FIIs and retail inflows is expected in 2022.
Other important factors that will influence the market are high valuations. India has been trading at the high end of the long-term P/E valuation for the past 2 years. The MSCI-India index is trading at a 1-year forward P/E of 22x, approximately ~20% higher than the 5-year average of 18.5x. Compared to other emerging markets, India is trading at a whopping 80% premium to the MSCI-EM index. Increases in inflation and interest rates will bring about changes in the investment pattern of households and the private sector. However, the overall impact on investment is expected to be low as the accommodative stance will be maintained and business performance is expected to improve in 2022-23 in terms of profits and capital expenditures.
The political scenario is stable, but crucial state elections scheduled for March and May are important points to consider, especially for FIIs, which will cause short-term volatility. Whether this will affect the union budget for 2022 to announce populist measures remains to be seen. However, the market is not much concerned about this, because while it is being done, it is unlikely to have a long-term effect on the budget and the economy.
In short, consolidation was and is expected in the stock market. On the positive side, however, consolidation has already begun since October 2021. From all-time highs, Nifty50 and Nifty500 have corrected 13% and 12% respectively to 20e December 2021. We do not expect any further deep correction in the stock market as the Indian economy is supported by a strong outlook with forecast to be the best performing major emerging markets. The reforms implemented over the past 2-3 years will bring new economic growth, especially for manufacturing in India. Corporate tax cuts and areas supported by PLI schemes will bring new investment and manufacturing capacity in segments such as electronics, equipment and apparel. These are positive for capital goods, consumables, textiles and contract manufacturing. The quality of India’s work in segments such as information technology with rising global demand for digitization, chemical demand from global outsourcing and healthcare through quality and capacity of pharma and API is well known.
India is believed to be trading at premium valuations due to high growth. And this ongoing consolidation will limit the market price correction in 2022. Short-term volatility is expected as the broad market still trades at high valuations and areas that did well in 2021 may not retain that tag in 2022. The focus going forward will be on pockets that will benefit from futures. investment (such as manufacturing and renewables) and a further reopening of the domestic economy (domestic and tourism) and an increase in global demand.
(By Vinod Nair, head of research at Geojit Financial Services)
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