For the equity markets, 2021 is ending on a rather curious note. Even though a myriad of concerns clouds investor sentiment, greed continues to be the dominant factor driving investment strategies.
Notwithstanding the threat of a new, and more contagious variant of the coronavirus, inclement weather conditions, persistent inflationary pressures, uneven economic recovery, uncertainties over earnings growth, elevated valuations in certain pockets of the market, tightening liquidity, and the rising probability of higher borrowing costs, domestic investors continue to remain sanguine about equities. Flows to equity funds are strong. Initial public offers (IPOs) are attracting record responses.
The share of household investors in ownership of listed companies as well as daily market activity has risen materially over the past couple of years. Despite the recent correction in stock prices, small-cap stocks are still sharply outperforming. The Nifty Smallcap 100 has yielded a return of over 59 percent in the past one year compared with about 27 percent for the Nifty 50. Cyclicals such as realty and metals have outperformed defensive sectors such as FMCG and pharma — implying that, for now, greed continues to dominate fear.
Given the present circumstances, the outlook for 2022 is pretty simple, and straightforward. One does not need any clairvoyance skills to state that 2022 will be nothing like 2021 for investors.
Much like the Delta variant in 2021, the Omicron variant of the coronavirus may be a matter of serious concern in the first few months of 2022; but the monetary policy and fiscal response to this concern are unlikely to match the stimulus provided in 2021. Of course, a much-worse-than presently estimated impact of Omicron may perhaps delay the anticipated monetary tightening by a few months, but it is least likely to prompt monetary easing or meaningful fiscal stimulus.
The economic growth recovery from the impact of the COVID-19 pandemic is almost complete, and the advantage of a lower base may not be available in the second half of 2022. Fresh restrictions due to the Omicron spread may also slow economic growth a little.
The pent-up demand that supported corporate earnings in the second half of 2021 may not be available in 2022. However, the stagflationary conditions may continue to exert pressure on demand, hence constricting pricing power.
Two themes, therefore, will stand out in 2022: survival, and sustainability.
Survival: The strategy narrative in 2021 was mostly focused on the ‘post-COVID-19 world’. Omicron and subsequent variants may change this narrative to ‘living with COVID-19’.
Governance, administrative, and business strategies may begin to incorporate COVID-19 as a long-term variable, rather than a short-term aberration. We may therefore see COVID-19 protocols becoming intransient in governance, business, and social practices. This essentially means significantly higher investment in (digital) technology, cut in non-essential travel, higher healthcare expenses, no impromptu COVID-19 stimulus, and mostly unrestricted mobility with vaccination and testing. The logistic constraints may ease materially, and consequently, the ‘supply pushed’ part of inflation may ease to some extent.
Sustainability: Besides COVID-19, inclement weather has been one of the dominant concerns in 2021.Weather patterns have changed dramatically in most parts of the world. Unseasonal rain and snowfall, unusual dry spells and wildfires, multiple flash floods, and rougher seas impacted human life significantly. Materially elevated food and energy prices are two of the most visible impacts of Climate Change.
The extraordinary cost to businesses and to the people may continue to force governments and businesses to focus more on Climate Change. Sustainability will continue to be a key investment theme not only in 2022, but for most of the current decade.
The Sensex may move mostly in the 54,000-59,000 range during the first half of 2022, with occasional violations on both sides. In the second half, we may see a sustained rise to the 60,000-63,000 range.
Vijay Kumar Gaba is Director, Equal India Foundation.
Views are personal and do not represent the stand of this publication.
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