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Here's what to expect from equity markets in 2022

Foreign institutional investors were net sellers in the most recent quarter

markets-bull-bear Representational image | Shutterstock

The new year 2022 began on a strong note for stock market investors, with the benchmark BSE Sensex gaining more than 929 points (1.6 per cent) on Monday to close at 59,183.22 level.

This was on top of the stellar run markets had in 2021; returns from stocks trumped all other asset classes like gold, debt instruments and bank deposits. The BSE Sensex returned 22 per cent in 2021 even as the COVID-19 pandemic continued to weigh. 

But, with a resurgence in coronavirus infections around the world fueled by the Omicron variant, inflation rearing its head in major economies and global central banks beginning to tighten their pandemic era easy money policies, investors may have to brace for more uncertainty and perhaps temper their market returns expectations this year.

“The starting point for the Indian stock market is not great, given a combination of rich valuations for the market, sectors and stocks, which already factor in our expected strong growth in the economy and earnings over the financial year 2023-24 and likely increase of interest rates,” said Sanjeev Prasad, MD and co-head of Kotak Institutional Equities in a report. 

The Federal Reserve has already started doubling the pace of tapering its bond purchases and is likely to increase interest rates three times this year, with US inflation touching 40-year highs in December 2021. The Bank of England has already raised interest rates last month. Domestically too, the expectation is that the Reserve Bank of India will continue to tighten its monetary policy and raise rates this year. 

“We expect repo rate increase of 50 basis points in the second half of calendar year 2022 and 100-125 bps over the interest rate cycle (15-18 months starting second half of 2022), assuming average inflation of 5 per cent in calendar 2022/ fiscal year 2023,” said Prasad of Kotak. 

Foreign institutional investors were net sellers to the tune of Rs 38,521 crore over October-December 2021, driving down their net equity investments in India in 2021 to Rs 25,752 crore, compared with Rs 1.70 lakh crore they pumped into India’s equities in 2020.

The FII sell-off to an extent was offset by continued inflows into domestic mutual funds. The net assets under management of the mutual fund industry stood at Rs 37.34 lakh crore at the end of November 2021. Will domestic investors continue their faith in mutual funds and stocks this year too, needs to be closely watched. 

Jinesh Gopani, head of equity at Axis Asset Management, says that volatility will be a key part of the markets in 2022.

“Markets have seen a one-way rally since 2021 driven by several tailwinds in the economy, the progress of vaccination and the return of corporate profit growth. While these factors continue to play out, select pockets of the market have run up above expectations. This excess is what is correcting,” said Gopani. 

Since the peak of 62,245.43 hit on October 19, 2021, the Sensex is down over 6 per cent. Markets will take “intermittent breaks from time to time to digest information before the rally continues,” opined Gopani and he feels investors should use opportunities provided by market corrections to top up their existing investments.

Santosh Kumar Singh, head of research at Motilal Oswal Asset Management says, the market may remain range-bound this year amid rising inflation and interest rates moving up. High valuation companies may start seeing a relative correction, he feels.

“It may not be a year of broad-based rally, but would be a year for stock pickers. One needs to be very selective as the value destruction in certain segments can be significant,” said Singh. 

What should investors do in such a scenario?

Rahul Shah, co-head of research at Equitymaster says their strategy is to look at broader market valuations, like the BSE Sensex price-to-earnings (PE) multiple, and when its below the long-term average of 20-21 times, then they increase exposure to stocks to 70-75 per cent of the portfolio and the rest in bonds. Currently, he feels the PE is significantly higher than its long-term average and therefore, investors shouldn’t hold more than 50 per cent in stocks and the rest could be in bonds or fixed deposits. 

“Right now, I don’t see a case where you can be maximum in stocks. You can be to the extent of 45-50 per cent and the rest can be in bonds. This way, you can book profits you made in the last 12-18 months. Plus, you are not losing out on opportunities in stocks, because you have 50 per cent still invested in stock markets,” said Shah.

He further added that he would invest wherever there is decent PE multiple, strong balance sheet and not essentially look at specific sectors. 

“Public sector undertakings (PSU) look attractive to me from a risk reward perspective and all the noise around privatisation. There is value in some of the auto stocks. By and large most of the other sectors are looking expensive though,” said Shah. 

Gopani of Axis AMC says consumer and finance sectors are “ideally positioned” to benefit from the demand recovery theme playing out. Furthermore, given the digital trends playing out across the economy, the AMC has also increased allocations to select companies, which could “disproportionately” benefit from this over the medium term.

Singh of Motilal Oswal AMC also agrees on the digital theme.

“This was the predominant theme during calendar 2021 with IPOs of multiple new-age digital companies. Digitisation has also meant that the Indian IT companies are growing at the fastest pace seen over last decade. We may see this theme to remain one of the predominant one,” he said.

Among other themes, Singh sees revival in the residential real estate sector continuing this year, given the improving demand scenario. Large banks are also well placed with one of the best expected years on the credit quality front in over a decade, unless the pandemic creates further issues, he added. 

Despite a structurally positive environment, insurance companies had a bad year from a stock market perspective and given their cheap valuations and traction in earnings, 2022 may turn out to be a great year for them, feels Singh.

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