By Ankika Biswas
MUMBAI – With the cost-push inflation and Omicron variants posing threat to the nascent global economic recovery, Indian equities are likely to witness a roller coaster ride at least in the initial part of 2022.
Just when soaring inflation was prompting major central banks around the globe to rethink on the surplus liquidity they were pumping into economies, the highly-mutated Omicron is now seen further stoking price pressures.
A likely hike in interest rates by the US Federal Reserve is one such concern pointed out by experts that may weigh on equities globally.
Some repricing in Asian equities is seen in the first quarter of 2022, as history suggests that stocks tend to de-rate in terms of valuation multiples six to nine months ahead of the first interest rate hike, which is seen in September, said Nomura International.
“Whenever there was easy money, there was movement of money from developed markets to emerging markets, and a reverse flow with liquidity normalisation,” said Joseph Thomas of Emkay Global. Therefore, the price-to-earnings expansion, which resulted from easy liquidity conditions may get moderated over time.
Likely to be amplified by Omicron, inflation will induce higher volatility into Indian equities as investors assess the impact of the new strain on the economy and businesses, and position themselves accordingly.
Another factor that will decide investors’ bets on India’s growth story is the Union Budget for the next financial year starting April, as greater emphasis on social development and infrastructure is essential to kick-start private investment cycle. Overseas investors, who have been on a sell mode recently, will be looking forward for cues to make a major comeback.
As the cloud of these near-term threats passes, it will make way for foreign investors to return to India, experts said. Inflows from FIIs, which hit an 8-year high in 2020, slowed down significantly towards the fag-end of 2021 amid inflation and Omicron risks. They have net bought equities worth just $4 bln this year, the lowest since 2016.
However, the risk of volatile equity inflows from foreign portfolio investors on external sector is being mitigated by rising foreign direct investments, primary flows and lower vulnerability on the current account front, said ICICI Securities.
Further, a structural rise in household savings into equities is emerging as another counterbalancing force.
The above-mentioned factors will also decide the course of action for domestic investors, who have supported equities in a big way this year. Domestic institutional investors net purchased shares worth more than $10 bln year-to-date, the highest since 2018.
Continued inflows from domestic institutional as well as retail investors, therefore, hinge on the potential impact of Omicron on recovery and cues from the Budget.
Unless Omicron triggers a third wave, 2022-23 might be the returning to per-pandemic normalcy with a few areas of concern, said Prashant Tapse, the vice president (research) at Mehta Equities.
The volatility expected in the initial period of 2022 is seen bringing in some consolidation, which will result in narrowing of the valuation gap of Indian equities to their Asian peers. This, coupled with a strong earnings growth and favourable government policies would aid Indian equities in 2022, believes Morgan Stanley.
India was the best performing emerging market in 2021, even as the second wave of the pandemic wrecked havoc on people’s lives. In fact, the MSCI India index surged about 22% year-to-date, compared with the MSCI Emerging market index’s over 4% fall. This stellar run for the MSCI India index follows the 16% gain in 2020, against the MSCI Emerging Market index’s 18% gain.
Even though Nifty 50 has corrected 9% from its all-time high, returns on investment in the index has still been in double-digits for investors in 2021, at around 22%. The index tested an all-time high of 18604.45 points in October. At 1058 IST, it was up 0.6% at 17193.55 points.
While the current expensive valuation may induce some more correction in initial part of 2022, the fact that money is flowing from over-stretched segments to value segments is a sign of bull markets, said Amit Gupta, a fund manager at the portfolio management services division of ICICI Securities.
More capital-efficient companies with higher price-to-earnings multiples have entered Nifty 50 index, which is yet another factor that can keep sustainability even at elevated valuations.
While higher inflation and monetary policy normalisation globally may affect market momentum and flow of money into equities in the near term, the optimists on the Street are hopeful of double-digit returns in 2022.
Whether that will be a reality, only time will tell! End
With inputs from Vivek Kumar from Joe Milton
Edited by Akul Nishant Akhoury
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Source: Cogencis
