Defined in 5 charts: Will 2022 be a 12 months of consolidation for Indian fairness markets?


(This story initially appeared in on Jan 05, 2022)

NEW DELHI: Indian equities emerged because the best-performing market amongst not solely its regional friends in Asia in 2021, nevertheless it additionally beat the developed market though the market has witnessed some correction within the final one month.

The 12 months 2021 was a dream run with inventory costs touching report highs and preliminary public choices witnessing the very best mop up ever. Nevertheless, the 12 months 2022 might be a 12 months of contrasting narratives — one with warning and the opposite with continued optimism, mentioned brokerage HSBC in a analysis report.

The 2021 rally

The market rally was largely led by flush liquidity, supportive financial coverage, better-than-expected tempo of post-pandemic macro restoration, and a robust vaccination drive. However buyers are actually apprehensive whether or not the current market weak point, with the Nifty down 7% since October 18, is a sign that the market could be getting into a bear section, mentioned Amit Sachdeva, fairness analyst at HSBC Securities.

Even the market breadth − which touched practically 100% in October − is now at 62%, the bottom in a 12 months, highlighting a broader consolidation within the current fall of the market. “This additionally suggests to us that market is not any extra overheated, and presents selective alternatives,” famous Sachdeva.

The robust rally of 2021 was led by utilities, industrials, supplies, and actual property; whereas FMCG, healthcare, autos and finance sector had been the important thing laggards.

What was the primary driver for the rally?

International institutional buyers (FIIs) had been clearly one of many principal drivers of the fairness market rally submit pandemic, as they pumped in over $37 billion between April 2020 and March 2021.

Nevertheless, FIIs have since turned cautious. India has witnessed web outflows of $600 million since April 2021 as a result of a excessive market valuation, expectation of an increase in US bond yields, increased inflows within the main market. Extra importantly, mainland China is again on the FII radar, mentioned the HSBC report.

And what are the largest considerations for 2022?

Rotation of flows to different markets in Asia largest concern

However 2022 will see the alternative: In line with analysts at HSBC, whereas 2021 noticed cash flowing from China to India, 2022 might see FII flows rotating again from India to China.

US tapering: The US has already begun tapering and is anticipated to double the tempo of tapering after December. HSBC expects a 25bp fee hikes in June 2022, September 2022, March 2023, and September 2023, which additional provides uncertainty to FII flows into rising market equities comparable to India.

Final time, when US QE tapering was introduced in 2013, the Indian fairness market misplaced 15% over a interval of three months, with a steeper fall in midcaps.

Nevertheless, this time round, such a sell-off is unlikely given India’s foreign exchange reserves are up 2.2x since 2013 whereas the present account is in a lot better form than in 2013. Even India’s annual FDI run fee has greater than doubled since 2013.

Rise in crude oil costs

Whereas crude has corrected from its peak, costs are anticipated to remain elevated and this stays a key issue influencing volatility in India’s market due to the nation’s heavy dependence on crude oil (oil import constitutes 28% of complete import invoice).

The opposite massive considerations embody costly valuation and headwinds within the type of financial development anxieties, and uncertainty in regards to the unfold of the brand new Covid-19 variant.

On the brighter facet, there are various macro indicators portray constructive image for financial restoration in 2022 and these embody prospects of a brand new funding cycle, continued momentum of funding in new-age firms, and profitable listings and an earnings development outlook for FY22 and FY23.

A plethora of IPOs are coming: Offers value $16 billion have already been introduced in 2021, and a number of other new age firms are already lined up for IPOs over the subsequent couple of years.

“The market’s enthusiasm for brand spanking new IPOs is even elevating implicit period pricing of different worthwhile listed companies. We imagine that IPO exercise will possible stay excessive in 2022 as effectively, and proceed so as to add to the market’s ‘danger on’ momentum regardless of the hits and misses,” mentioned Sachdeva.

Taking cues from historic efficiency, HSBC expects one other 6-8% draw back to the market from present ranges and a rebound thereafter.

“On stability, we don’t see a case for any deep correction; the market has already corrected 7% from its current peak, however we don’t rule out one other comparable correction from present ranges, earlier than the market might flip to its personal structural bullish momentum,” mentioned Sachdeva.

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