Two factors, easy money policy and strong inflows from both FIIs & retail investor helped for a strong equity performance in 2020 and 2021. However, this will change in 2022 leading to moderation in returns. Quantitative easing measures have started to tighten, and actions will be strengthened in 2022. This will impact FIIs inflows in the short-term to EMs like India. Additionally, FIIs have a cautious view on Indian market due to high valuations.
Rise in retail investors, was a global phenomenon, led by fiscal household policy, rise in low-cost and research supported platforms, bounce in secondary and primary market. It does usually happen as secondary and primary market brings profits. However, we need to acknowledge the timing and scope of retail investors to buy equities with such passion post the 2020 global sell-off. It is a progressive learning from the long-term investment pattern, like taking inputs from the 2008 global financial crisis and the market performance post the event. Overall, moderation is expected in FIIs and retail inflows in 2022.
Other key factors which are going to influence the market is high valuations. India has been trading at the upper band of the long-term P/E valuation in the last 2 years. MSCI-India index is trading at 1year forward P/E of 22x, about ~20% higher than 5 year average of 18.5x. Comparing to other EMs, India is trading at a whopping 80% premium to MSCI-EM index. Rise in inflation and interest rate will bring changes in household and private sector investment pattern. However, the overall consequence on investment is anticipated to be low as accommodative stance will be maintained and corporate’s performance is expected to improve in 2022-23 in profits and capex terms.
Political scenario is stable, however crucial state elections scheduled in March and May are important points to ponder on, especially for FIIs, which will bring volatility in the short-term. Whether this will influence the 2022 union budget to announce populist measures has to be seen. However, market is not very concerned regarding this since even though done, unlikely to have a long-term effect on the fisc and the economy.
In a nutshell, consolidation was and is expected in equity market. However, on a positive note, a consolidation has already started since October 2021. From the all-time high, Nifty50 and Nifty500 has corrected by 13% and 12% respectively till 20th December 2021. We do not anticipate a further deep correction in the equity market because Indian economy is supported by strong outlook with forecast as the best performing large EM. Reforms undertaken in the last 2-3 years will bring new economic growth specially to manufacturing in India. Cut in corporate tax and areas supported by PLI schemes will bring new investment and manufacturing capacity in segments like Electronics, Equipment and Garments. These are positive for capital goods, ancillaries, textile, and contract manufacturing. India’s quality of work in segment like Information Technology with rising global demand of digitation, demand for Chemicals by global outsourcing and Healthcare by quality and capacity of pharma and API is very well known.
India is supposed to trade at premium valuations due to high growth. And this ongoing consolidation will limit market price correction in 2022. Near-term volatility is anticipated since the broad market is still trading at elevated valuations and areas which have done well in 2021 may not retain that tag in 2022. The focus going forward will be on pockets which will benefit from future investment (like manufacturing and renewables) and further reopening of domestic economy (Domestic focused & Tourism) and rise in global demand.
(By Vinod Nair, Head of Research at Geojit Financial Services)