2021 has been the best year for Indian Equity Markets, where the broader market rallied almost 25%, thus outperforming all emerging as well as developed markets globally. However, the year 2022 could be a year of the contrasting story — one with caution and the other with continued optimism. Here is a 5 point analysis of the India Equity Market 2022.
5-Point Detailed Analysis:
This article will be based on the following 5-pointers:
1) Performance of Emerging Markets in Asia:
- While comparing the emerging markets in Asia, India has outperformed other countries by delivering the highest return of 25% in the year 2021.
- Next to India is Taiwan with 19%. Whereas the Developed market has delivered returns of 14%.
- Emerging Markets like Indonesia, the Philippines, Hong Kong, Asia ex-Japan, and even China delivered negative returns. In an emerging market in Asia, China performed the worst, with negative returns of 20% in 2021.
2) Key Drivers of India’s 2021 Rally:
- High Liquidity available in the market:
- Strong FII Inflows into Indian Equity Markets
- The inflow of $37 Billionduring FY2021
- The outflow of $600 MillionSince April 2021 is due to:
a) High Market Valuation
b) Expectation of rising in US G-Sec Yield
c) China back on FIIs radar
- Supportive Monetary Policy by Central Banks globally: Supporting monetary policies by Central Bank globally led to the strong flow of Foreign Inflows especially in the emerging markets, which highly benefited India.
- Better-than-expected Macroeconomic Recovery Post-Pandemic
- Strong Vaccination Drive boosted Optimism in the market
3) Sectors – Drivers & Laggards in 2021 Rally:
- Sector indices like Utilities, Industries, Materials, Realty, Telecom, IT, Consumer Durables, and Energy have outperformed the Nifty 50 Index.
- Top Underperforming sectors in 2021 in comparison to Nifty 50 are Finance, Auto, Healthcare, and FMCG.
- Looking at the overall performance of the sectors, the cyclical sector like Metal etc. has outplayed its past underperformance in 2021.
4) Major Concerns for 2022:
i) Biggest Concern – Rotation of Flows to Other Markets in Asia:
- In 2021, China witnessed a heavy outflow of foreign exchange and India was the major beneficiary of that trend, but in 2022, there could be some turnaround, and China could again witness foreign inflows.
- Will this trend bring a major crash in the Indian Stock Market? The answer to this is- NO since the domestic flows are quite strong enough that it might offset the impact effect of outflow of foreign exchange.
ii) US Tapering:
a) Speeding-Up of Interest Rate Hike by US Federal Reserve:
- The US is expected to double the pace of Tapering in 2022
- 25 bps rate hikes are expected in June 2022, Sept 2022, March 2023, Sept 2023
- With a Rise in US G-Sec Yield (1.75%), FII flows will turn to US Bond Market
- Uncertainty of FII flows into Emerging Equity Markets like India.
b) Impact of US Tapering on Indian Equity market – 2013 vs 2022
- The 2013 Year: When US QE Tapering was announced: Indian Equity Market has lost 15% over next 3 months.
- Compared to High FIIs outflows in 2013, FIIs sell-off is unlikely in 2022
- Ther will not be a major impact of US QE Tapering Due to Better-Positioned Macro-Economic Parameters in 2022 vs 2013.
- India’s Forex up 2.2x since 2013 stood at $635 billion as of Dec-21 and India’s Current Account Deficit is in much better shape than 2013.
c) India’s Annual FDI Rate is more than Doubled since 2013:
iii) Rising Crude Oil Prices:
- Due to India’s Heavy dependence on Crude Oil, there could be a piece of bad news for India on account of rising crude oil prices
- Oil Import contributes 28% of Total Import Bill. Hence, if the crude oil price rises, it will hugely impact the import bill of the country.
iv) Expensive valuation of India Equity Market:
The Indian market is trading at a very high valuation, and hence there could be consolidation in the market in 2022
v) Other Major Headwinds for Indian Equity Market:
- Economic Growth Anxieties like the downgrading of India’s GDP
- Uncertainty about the spread of Omicron variant
5) Continued High Momentum for New IPOs in 2022:
- Like the year 2021, the High Momentum for New IPOs in 2022 is also expected to continue.
- In 2021, around the US $15.8 billion has been raised via Initial Public Offerings (IPOs), which is the highest in the history of the Indian Stock Market surpassing the level of US $12.5 billion in 2017.
- Adds Enthusiasm in the Market
- Raises Valuation of Other Profitable Listed Businesses
Brighter Side of 2022:
- Macro-Economic Indicators showing positive picture for Economic Recovery in 2022
- New Investment Cycle – New Capex by Corporates: The government has played its part in providing support during the pandemic, and now Private Players need to step forward and invest big amounts.
- Strong momentum of investment in new-age companies
- Successful Listings of IPOs
- The strong Earnings Growth outlook for FY22 and FY23
What Should Investors Do?
India has performed exceptionally well in the year 2021 especially in the emerging markets in Asia. The same trend is expected to continue in the year 2022 on account of a favorable macro-environment, but with the presence of certain key headwinds. From a longer-term investment viewpoint, one should stick with its investment strategy and should focus on his/her proper financial planning.