The year 2021 saw Nifty50 jump by 24% thanks to a record participation of the retail trade and inflows of foreign investors. This is the third year in a row that the 50-stock index has posted double-digit gains after returns of 15% and 12% in 2020 and 2019, respectively. Heading into 2022, investors are on their toes. The cases of Covid-19 are increasing. Partial closures have been announced in various states. Budget 2022 is fast approaching as parliamentary elections are scheduled in seven states. Globally, the US Federal Reserve is poised to raise interest rates, which has triggered IFI outflows from emerging markets, including India.
âStock valuations are on the rise even after consolidation. Thus, the stock market is vulnerable to disruption and high volatility. The main risks include declining liquidity due to hawkish monetary policy, rising inflation and yields, weak economy and rising geopolitical issues, âsaid Vinod Nair, head of research at Geojit. Financial Services.
We give you critical developments that can stop the stock market bull run in 2022:
Increase in Covid-19 cases
New year and the new Omicron variant, which is highly transmissible. Omicron business has always been on the rise. India now has 2,135 cases of Omicron, with Maharashtra and Delhi leading the tally with 653 and 464 infections, respectively. The total number of Covid-19 cases has increased over the past seven days, with 58,097 new infections reported on Wednesday, January 5. Partial closures and nighttime curfews have been announced in various states.
“In the short term, the rapid spread of Omicron can worsen lockdowns, supply bottlenecks, inflation and, as a result, central banks could withdraw more liquidity,” says IIFL Securities in a note from research.
The year 2022 has scheduled seven state assembly elections. Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur will have it in the first part of the year while elections in Gujarat and Himachal Pradesh will take place by the end of the year .
âWe can expect populist measures to be announced in the budget. However, these could be accompanied by the weakness of rural and disadvantaged sectors due to the loss of income induced by the pandemic. This is unlikely to affect long-term fiscal policy, but a short-term impact is expected. The market can remain cautious during this uncertain time, âsays Nair from Geojit.
Vinit Bolinjkar, head of research at Ventura Securities, believes the government can anticipate its investment plans for job creation as elections approach or it could announce tax breaks in the 2022 budget for individuals.
US Fed rate hike
Monetary policy in the United States plays a major role in the performance of stock markets in emerging economies. Fed chief Jerome Powell announced three rate hikes of 25bp each in 2022. The first is expected by June 2022. This has already triggered FII exits from India, putting pressure on benchmarks. Foreign investors sold shares worth 19,000 crore in December itself.
âThe transition to 2022 will see more normal monetary policy, and investors may well expect more moderate returns from financial markets. Central banks will start to raise rates but will remain more tolerant of inflation. Central banks and their assessment of economic conditions will likely be central to shaping investment strategies again in 2022, âsaid Deepak Jasani, head of retail research, HDFC Securities.
The earnings outlook should be seen against the backdrop of an expected rise in interest rates. âInterest rates are definitely going to weigh on corporate profits. Profits will also have an impact due to commodity prices and the ability of companies to pass increased costs on to consumers, âsaid Bolinjkar of Ventura Securities.
What is good, however, is that companies have deleveraged well. âThe impact of the rise in interest rates in 2022-2023 will be small. However, it will have an effect on companies with heavy balance sheets, infrastructure and key sectors. This needs to be reviewed in the context of the growth in activity due to capital spending and profit growth. It should also be positive for the banking industry, âsaid Nair from Geojit.
The Nifty50 Index trades at a one-year futures earnings of 21x, which is about 18% above the seven-year average of 18x. It was then that the Nifty fell more than 5% from its all-time high, reached on October 19, 2021.
âAfter a great show in 2021, the valuation levels of Indian stocks could make most people cautious of India in emerging markets and Asia,â Jasani said.
However, there are reasons the country will continue to trade at a premium. âThe Indian market still has the potential to surprise positively, as its macro-construction – GDP growth, tax collection, abundant liquidity, start of an investment cycle, list of startups leading to feelings of risk, politics favorable monetary policy, better than expected pace of macroeconomic recovery after the pandemic, likely inclusion of Indian bonds in the global bond index by the second quarter of FY22 and strong vaccination campaign – and earnings remain broadly favorable â , said Jasani.
Making money on the stock market has been a snap for the past couple of years. Be careful as the year 2022 approaches. âThe bottom-up approach will be the flavor of 2022, as the easy money period is now surely behind us,â Bolinjkar said.