Times are changing, and 2022 will be a year of reset for markets

However, unlike the QE withdrawal in 2012/2013, India is in better situation now. The Indian Rupee is stable; forex reserves are healthy, and inflation is under control. In addition, India is set to emerge as the fastest-growing economy globally. Even at home, the Reserve Bank of India (RBI) has hinted about gradually reducing the surplus liquidity in the system, and is keeping a close watch on inflationary trends. So essentially, all eyes would be on inflationary pressures, the pace of economic revival, and its fallout on the trajectory of unwinding of monetary policy in India, as well as globally.

New Multi-Year Growth Cycle

Globally, the US — the country that really matters — has ambitious capital expenditure plans across physical, social, and health infrastructure. Over the next few years, the planned capital investment of around $2 trillion could lift growth rates in the global economy itself. That’s the next big reset; the beginning of the Rebuild America expenditure spree.

Domestically, India is on the cusp of a multi-year upcycle in economy, and sustained healthy growth in corporate earnings. The policy framework is supportive of economic growth, and initiatives have been taken to revive property and capex cycles that tend to last for a period of 4-6 years.

Banks are in much better health now (net NPAs are at 2.3 percent in the banking system as on March) and balance sheets have enough capital to support strong growth in advances going ahead. The global economic environment is also favourable enough to support a sustained upcycle in the Indian economy.

Easy Money Is Over, Back To Fundamentals

In the last one-year or so, the twin engines of easy liquidity and a ‘V’-shaped recovery in corporate earnings drove the dream run in equities. After a long time, we have seen five consecutive quarters of a healthy growth in earnings of Nifty/BSE 200 companies, which have been ahead of expectations. Consequently, the consensus earnings upgrades continued for a more than a year, a trend that had been elusive for more than a decade.

However, with the withdrawal of easy and cheap money globally, the fundamentals would come to fore. The newbies in the equity markets had a dream run, but will have to learn to digest the fact that the equity market returns will revert to the long-term average of mid-to-high double-digit returns, which itself are very healthy compared to other asset classes, especially fixed income (bank deposits).

Quality matters; it would be quite evident in 2022.

Regulating Cryptos – Moment Of Truth

Central banks across the world have woken up to the risk of an unsupervised run-up in the cryptocurrencies (or crypto-assets). Clearly, the regulators are likely to impose certain restrictions on crypto trading, and levy of taxation on realised profits in cryptocurrencies. Also, the digital currency backed by various central banks could be introduced in 2022, creating some disruptions in the crypto space.

Time To Rethink On Portfolios

One needs to evolve with time, and adapt to changing dynamics. This goes for the investment strategy too. The focus on sustainability, Climate Change, and other non-traditional parameters requires investors (at least for investors with a medium- to long-term vision) to rethink the portfolio building strategy. We expect increasing acceptance of ESG mutual fund schemes and/or individual stocks that score high on ESG front.

Gaurav Dua is Head – Capital Market Strategy, Sharekhan by BNP Paribas. Views are personal and do not represent the stand of this publication.