Validus Wealth

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”

Four domestic factors that may seal the fate of equity investors in 2022

Economic Times, 27th  December 2021, Rajesh Cheruvu

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” These words of wisdom from legendary investment guru Benjamin Graham stood true yet again in recent times. Post the outbreak of pandemic and market gloom in March 2020, economies fell flat across the globe, lives were lost, businesses suffered, and corporates bled. However, a massive market rally cheered investors as benchmark indices rallied almost 140 per cent from the bottom in March 2020 in the next 18 months to make a new high in October 2021. In this calendar year itself, the market has delivered 22.5 per cent return. Amid some concerns, investor sentiment remains buoyant as we approach the end of the year. The market has moved ahead of the actual recovery in the economy and corporate earnings, and valuations are near all-time peaks. The overall outlook for 2022 remains positive, albeit with relatively lower return expectations. The economy has started to expand, and corporate profitability is getting back on its feet. In addition, industries have almost reached their pre-Covid levels, and earnings are slowly catching up to the valuations. As a result, we find Indian equities attractive, based on the substantial recovery from the pandemic trough, expected healthy growth, and government reforms in coming years. Tax buoyancy has been at its best in the past five years too. Employment growth indicators are amongst the best over the past seven years, the fourth consecutive year of normal monsoons for the first time in the rainfall history of 115 years, leading to a healthy rural demand. What drives the optimism further is the willingness of the government to bring reforms. In January, the finance minister proposed significant spending on infrastructure over the next five years by deferring the fiscal deficit targets to that effect, which appear to be not constrained by the risk of sovereign credit rating downgrades. The government also announced PLI schemes in 13 key areas with an outlay of nearly ₹2tn over five years to promote manufacturing and thereby reduce imports, which is the right step towards its goal for Make in India. Listed corporates reported market share gains and margin growth primarily led by cost optimization throughout CY21. However, in the September quarter of FY22, persistent inflationary pressures driven by global commodity price rise and supply chain disruptions impacted operating margins. Towards offsetting these cost pressures, corporates have been hiking prices and will continue to do so. As a result, EPS is forecasted to grow at approximately 20 per cent CAGR for the next two years, with corporate profits as a percentage of GDP trending higher, post bottoming out in FY21. Domestic institutions (especially mutual funds) and Retail / HNI investors have provided the required liquidity support in the secondary market in the past few months. Healthy SIP subscriptions coincided with lump sum inflows that augured well for MF net flows and helped them be net buyers in the market to offset the pressure of FPI outflows in the past four months. While FPIs (primarily PE, VC, pension, and sovereign category funds) have been hyperactive in the start-up investing space (record unicorns in CY21) and primary markets (IPO offers), indicating their long-term commitments to the Indian market. However, concerns remain on the liquidity front due to tapering by global central banks. The recent run-up in commodity prices, supply chain constraints, and unusual spurt in consumption demand owing to high disposable savings led to persistent inflationary worries to central banks. These conditions have forced few central banks to taper the liquidity induced by them during the height of pandemic conditions. Further, central banks would be forced to squeeze excess liquidity and hike the cost of such liquidity if inflationary worries persist in the coming months of CY 22. This time around, RBI appeared to be well prepared by keeping in mind QE tantrums in 2013 to defuse any potential chaos in the domestic market, backed by healthy forex reserves and sustained capital flows. Some of the near to medium term market impacting triggers and events are:
  • 5 state assembly elections – BJP controls four states; vital for 2024 parliament elections
  • Power distribution sector unbundling package – It will improve the efficiency of Indian local government-owned distribution sector by incentivizing states for privatization
  • Disinvestment and strategic sale – It will give evidence of walking the talk, leading to market rerating further
  • Union Budget FY23 – It will lay the further roadmap for economic growth and reforms

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