Two factors, easy money policy and strong inflows from both FII and retail investors helped for a strong equity performance in 2020 and 2021. However, this will change in 2022 which will reduce the returns. Quantitative easing measures have begun to tighten, and actions will be strengthened in 2022. This will impact FII inflows in the short term for EMs like India. Additionally, FIIs have a cautious outlook on the Indian market due to high valuations.
The growth in retail investors, a global phenomenon, was led by increased fiscal domestic policy, lower cost and research backed platforms, secondary and primary market boom. This usually happens because the secondary and primary markets bring in profits. However, we need to acknowledge the timing and scope of retail investors buying equities with such passion following the 2020 global sell-off. It is a progressive learning from long-term investment patterns, such as taking input from the 2008 global financial crisis and the market’s performance after the event. Overall, FII and retail inflows are expected to moderate in 2022.
Another major factor that is going to affect the market is high valuations. India is trading at the upper band of the long term P/E valuation for the last 2 years. The MSCI-India Index is trading at 22x the 1-year forward P/E, which is nearly 20% higher than the 5-year average of 18.5x. Compared to other EMs, India is trading at an 80% premium to the MSCI-EM Index. Inflation and increase in interest rate will change the investment pattern of domestic and private sector. However, the overall return on investment is expected to be lower as the accommodative stance will be maintained and the performance of the corporate in terms of profits and capex is expected to improve in 2022-23.
The political scenario is stable, though the crucial state elections in March and May are turning points especially for FIIs, which will bring instability in the short term. Whether it will influence the Union Budget for 2022 to announce populist measures remains to be seen. However, the market is not too concerned about this as despite doing so, there is unlikely to be a fiscal and long-term impact on the economy.
In short, consolidation was and is expected in the equity market. However, on a positive note, a consolidation has already started from October 2021. From all-time highs, Nifty 50 and Nifty 500 have corrected by 13% and 12% respectively till 20.th December 2021. We do not expect further deep correction in equity market as Indian economy is supported by strong outlook with forecast as best performing large EM. The reforms made in the last 2-3 years will bring new economic growth especially in the manufacturing sector in India. There will be new investment and manufacturing capacity in sectors such as electronics, appliances and garments, supported by corporate tax cuts and PLI schemes. These are positive for capital goods, ancillary, textile and contract manufacturing. With the growing global demand for digitization, India’s quality of work in information technology segments, the demand for chemicals through global outsourcing and the quality and capability of pharma and APIs, healthcare is well known for.
India should trade at premium valuation due to high growth. And this ongoing consolidation will limit market price correction in 2022. Volatility is anticipated in the near term as the broader market is still trading at higher valuations and sectors that have performed well in 2021 may not retain that tag in 2022. On pockets that would benefit from future investments (such as manufacturing and renewables) and the reopening of the domestic economy (household-focused and tourism) and increased global demand.
(by Vinod Nair, Head of Research, Geojit Financial Services)
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