Year 2021, though marred by the pandemic, was when the global equity markets surged to record levels and most stocks touched all-time/52-week highs, spurred by the easy monetary policies adopted by governments and central banks the world over.
Now, as nations grapple with accelerating inflation, the tapering of monthly bond purchases and impending interest rate increases are becoming a reality earlier than expected.
The global stock markets are beginning to feel the jitters and foreign institutional investors are booking profit, rejigging their equity portfolios, and investing in other safe havens.
As 2021 draws to a close, the questions playing on the minds of investors are how the equity markets will fare next year, what changes policy shifts will bring, which sectors will be the safest, and which stocks are likely to generate better returns.
Experts are confident that the India growth story is intact. They say corrections are required from time to time to maintain the long-term health of the markets and provide opportunities to take fresh positions and gather steam for the next rally.
For 2022, a majority of them are of the view that with the uncertainty over how the Omicron scare will play out, it would be good to bet on defensive sectors such as information technology, fast-moving consumer goods and pharmaceuticals because the markets may remain in a consolidation phase. However, private banks, manufacturing, infrastructure, chemicals and travel and tourism could also provide good returns.
Nitin Sharma, India site head at Fidelity International, advises investors to focus on sectors offering structural revenue growth opportunities.
“IT segment, for instance, is looking at sustained demand, driven by rising technology spend by companies globally and increased offshoring,” said Sharma.
The auto sector offers a combination of pent-up demand and a long penetration cycle for new energy vehicles.
“Then, there are sectors with a positive growth outlook off a cyclical recovery,” he added.
Bank credit growth is expected to pick up and a rising capital expenditure cycle with an infrastructure boost will also augur well for construction, engineering and industrials. Demand in real estate is expected to be steady, driven by low interest rates and reasonable affordability.
“In many cases, the positives are partially built in in current valuations, so investors should tread with caution and look at individual stocks and valuations before investing,” Sharma said.
“Post the budget… the focus could shift to defensives like IT, FMCG and pharma even as the markets enter a consolidation stage,” said Deepak Jasani, head of retail research at HDFC Securities.
However, until the budget – likely on February 1 – cyclical sectors including banks, metals and public sector units can perform well, anticipating relief or better times, Jasani added.
Manufacturing could be a good theme in 2022, given robust demand and rising economic output.
“We expect sectors like capital goods, industrial, auto and consumption as better bets,” said Vinod Nair, head of research at Geojit Financial Services.
Apart from IT, pharma and FMCG, which have been consolidating in the past three to four months, Nair said he also expects sectors with a high correlation to growth in economy like tourism, media and logistics to gain traction in the later part of the year.
“Improved outlook and current lower interest rate regime can make housing and banking one of the major themes to watch out for in 2022,” said Neeraj Chadawar, head of quantitative equity research at Axis Securities.
He is positive on infrastructure as the government augments its spending in this sector. Digital and cloud remain long-term bets with home improvement and the travel & tourism sector is starting to look promising after the pick-up in vaccinations in the country.
“Small and mid-caps are picking up steam and balance sheet leveraging is likely to play out in 2022 with an improved outlook on return ratios and profitability,” Chadawar said.
On the other hand, Vaibhav Agrawal, CIO of TejiMandi, advises investors to focus on financials such as private sector banks, infrastructure and capex-related plays and IT services. The banking sector is coming out of a trough where all bad loans and provisioning related to Covid-19 have been taken in the profit and loss account.
“The capex cycle should revive, leading to growth in wholesale banking, and the buoyant economic activity should boost working capital requirements,” Arun Malhotra, founding partner of CapGrow Capital Advisors, told Moneycontrol. The strong uptick in housing sales and consumption should lift housing and retail credit.
Private sector lenders and those like State Bank of India should comfortably post 15-20 percent growth over the next two to three years, Malhotra added. He is optimistic about pharma, chemicals and telecom stocks and said IT still has some steam left, based on the strong demand outlook.
The revival of the Indian economy will be the most important driver for all sectors. Government spending and private expenditure, coupled with an increase in global demand, will help improve the overall health of businesses. The budget for FY23 will play a key role in shaping the overall path.
“Budget is expected to be a growth-oriented budget, led by higher government spending that will be further helpful in gaining economic momentum,” said Chadawar of Axis Securities. “Policy reforms like Aatmanirbhar Bharat and production-linked incentive schemes are likely to continue in 2022 and get a further push, along with infrastructure spending and affordable housing.”
Corporate earnings will be another driver.
“The Indian market has entered an earnings upcycle with expectations of 20-plus percent growth in the Nifty’s earnings in the next two years,” Chadawar told Moneycontrol.
Moreover, the return on equity for the broader market is improving after a muted performance for several years, he said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.