by Malvika Gurung

In recent months, Dalal Street saw more volatile trading after setting records in an emotional year that was dominated by bulls. 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. This, along with increased Covid-19 cases as well as supply chain disruptions made for a more turbulent year.

With that as a backdrop, here’s what can be expected from the Indian equity benchmark index in 2022.

A look at 2021

Stocks have had a great year in 2021. Positive market sentiment, liberal monetary policy, huge liquidity, lower interest rates and high-value asset prices all contributed to the Indian benchmark equity indics’ rise in 2021.

The Nifty 50 surged 23% and the 21% on a YTD basis as of December 29th’s close. This despite a 10% correction in Nifty 50 and Sensex from October 19th’s all-time highs. The USD-based growth was 24.7%, which is compared with a 4.9% increase for the.

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 appeared less affected than other developed countries by the Delta variant.

RBI (Reserve Bank of India), in its annual meeting, announced that key rates, such as reverse and repo, would remain unchanged to meet investor expectations. The US Federal Reserve announced that they would accelerate the reduction of pandemic-era bonds purchases until March 2022. It also indicated that it will increase interest rates by three times next fiscal year to combat rising inflation.

There were also fluctuations in foreign portfolio investors’ money flowing into capital markets. Their net domestic equity and debt investments amounted to $3.8 billion as of September 2021. This is the largest in nine months. Major investments were made in the telecom, media, oil & gas and construction material stocks.

The domestic market saw a significant outflow of foreign investments over the past 2 months due to several headwinds. There has also been a correction of almost 10% due to Omicron case surges in developed markets, and rapid withdraw of US incentives. Five months had passed without any inflows as of November. This makes it one of the worst years in terms of inflows over the past five. 

The 2021 market saw a surge in premium-valued public listings. That pace is now slowing, as inflation, liquidity drainage, and other factors enter the picture, setting the stage to a further market correction. These are the contrasts in fortunes Zomato Ltd (NS:) (BO:), which listed in July and popped 65%, and then went on to maintain those gains, and One 97 Communications Ltd (BO:) (NS:), the , which fell 27% and then continued to drop towards the end of the year after listing in November, highlights this change in market behavior. 

The Outlook for 2022

Analysts are expecting a moderate level of performance for 2022, given the outstanding years and record highs that asset classes had in 2021.

According to market experts, the Indian economy will grow between 8 and 9 percent in 2022-23. The economic outlook for Dalal Street is positive, as the economy slowly moves towards pre-Covid levels.

Along with this, it may prove difficult for Equities to recuperate recent losses and for flow into the Indian Market until later in 2018.

Valuation is also important. In that regard, the latest correction may help to reset market perceptions and lead to stronger 2022 Indian equity markets, suggests the Chairman Motilal Oswal Financial Services Ltd. (NS:).

According to some experts, the FPIs could return to Indian equities if the market achieves a correction of 15%. This is due to the increased 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. The Nifty50’s EPS has been increasing by 15% per year since FY19-21. Going forward, net profit margins are projected to reach 16% for FY23E. 

Macro considerations: Regional investment, Inflation

The threat of global inflation is not going away. US inflation is at its highest point in 40 years. The CPI stands at 6.8%. The UK’s inflation rate is currently at 5%. This marks the 10th highest level in 10 years. Inflation in the global market could have knock-on consequences for emerging markets such as India. Indian equity are among the most valuable in APAC and could be particularly vulnerable. 

Indian CPI is expected to rise by 5.8% in 2022, compared with 5.2% 2021. Companies will be faced with the dilemma of whether they want to increase prices or cut their margins as inflation is likely to continue in the coming year.

Some strategists believe that corporate earnings will improve despite inflation’s negative effects, due to a slower but more positive economic trend. In addition, analysts are still not reducing their expectations for corporate earnings growth in the next 6 months.

India’s fiscal and current balance positions are better positioned to combat global headwinds such as accelerating inflation and hiccups during the pandemic recovery.

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.

We will have to wait and see if valuations lead Indian indices to pull back or consolidate before they rise again. 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.

Moving forward experts believe that financial stocks (including insurance and banking), capital goods (fast-moving consumer good), technology, real estate and financial services (including financial services) will be overvalued.

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