The Calendar Year 2021 was very fruitful for the Equity market and equity shareholders. Despite the current correction of 8%-10% in the indices, the equity market has yielded a healthy return of around 30% in Calendar Year 2021. But should an investor expect these exceptional returns from the equity market for the Calendar Year 2022 as well, Let’s discuss some key factors which showcase some possible outlook of the Indian Stock Market in the Year 2022.
Factors behind Strong Returns in Calendar Year 2021:
1) Favorable Macroeconomic Conditions:
Discussing two favorable macroeconomic factors i.e., Lower Inflation and Lower Interest Rate has played out well in India in the calendar year 2021. Primarily due to lower interest rates, the debt asset class gets turned by the investors, and oppositely, the equity asset class seems to be very lucrative for investors. Hence due to the high entry of investors in the equity asset class also led to a high inflow of funds in the market.
2) Corporate Earnings:
One important thing which was observed in the earnings of the corporates this year or from the last calendar year was the cost-saving measurement of the companies across the sectors which led to impressive improvement in the operating profitability of the companies, and ultimately a strong development in the bottom line as well. Due to this improvement in the bottom line of the companies, the Earnings Per Share (EPS) of the company rises, which ultimately takes the share price up.
3) Inflows from Retail Investors:
The Inflow from Retail Investors in the equity market was extremely phenomenal this calendar year. Individual or Retail Investors participated in the equity market via indirect routes like Mutual Fund but also took the direct investing path which led to high inflows in the stock market.
4) Outperformance of Indian Market over Global Market:
Indian Equity Market has notably outscored other global markets and hence generated much healthier returns in the calendar year 2021.
What Lies Ahead for the Indian Stock Market for 2022?
1) Do not expect phenomenal returns:
Investors may have witnessed an outstanding performance of their portfolio and hence an exceptional return from equity investment. Compared with the historical performance of Equity Asset Class, the return of Equity Asset Class in FY21 and the Calendar Year 2021 are remarkably high. Hence, generally, it is observed that after an outstanding rally, the equity market or any other asset class might go through a muted phase, and therefore returns might not please the investors. It is always recommended to investors to expect rational returns i.e., higher single-digit or lower double-digit returns from Equity Market.
In addition, currently, the Indian Stock Market is trading at a premium valuation as compared to its historical valuation. This factor too should be kept in mind by the investors while investing.
2) Muted Foreign Inflows:
As it is being observed that US Federal Reserve might start raising interest rates in the U.S. which could have an impact on 10-Year G-Sec and may also commence Quantitative Easing Tapering (Q.E Tapering). Hence due to the possibility of rising interest rates, there could be muted foreign inflows in the Indian Market as Debt Asset Class will become attractive.
3) End of Beginner’s Luck period:
It is generally said that Beginner’s Luck plays very well at initials but pays off very hard in the end. Many new investors have entered the Equity market post-pandemic and they have witnessed a significant rally, but the corrections could be disheartening for them. If happens so, there could be some impact on the inflow of funds in the market, especially via the direct route.
4) Slowdown of Earnings Upgrade Cycle:
The Earnings Upgrade Cycle is now becoming quite slow which is highly active in the past 1-2 quarters. This is due to inflationary pressure on the input commodities of the companies, which is highly affecting their margins. The company is witnessing notable revenue growth but is lacking in terms of margin improvement. Hence in the coming Financial Year or H2FY22, there might be some impact on the earnings of the companies as well, if their Operating Profitability falls or lies below growth estimates.
5) Strengthening of US Dollar:
If the foreign inflows divert towards the US 10-Year G-Sec or the debt class and not towards the Indian Market, then the demand of US Dollar will show some rise, and ultimately can lead to the strengthening of the US Dollar. Further, if this happens, it will harm our import bill, as we are net imported of Oil and Gold, which could affect the Indian Currency as well.
What Should Investors Do:
Financial Year 2021 and Calendar Year 2021 as well have been very beneficial for the Investors of Equity Asset Class. The Equity Market has yielded a healthier return this year. But the above-discussed factors are some points to look after for the investors, as these factors raise some concerns over the continuation of the current phenomenal rally in the equity market. Hence one should expect a rational return from the equity asset class. Further, the calendar year 2022 could be a “Year of Acquisition” of Good Stocks for the investors.