Sensex, Nifty end the year of milestones on a high

India’s stock market ended 2021 on a positive note with benchmark indices closing nearly 1 per cent higher on Friday.

This is a befitting end to a year of milestones for the market with the benchmarks recording lifetime highs — the S&P BSE Sensex crossing the 62,000 mark and the Nifty 50 topping 18,400 in October on a rally driven by economic recovery post the pandemic induced slump.

Though there was volatility towards the year-end on concerns over the spread of the Omicron variant of Covid-19, the market has been on track for its best year since 2017.

Nifty 50 and the Sensex recorded gains of over 20 per cent this year. All nine sectoral indices gained with Nifty Metal leading with gains of around 70 per cent. The rally was broad-based with gains extending to mid- and small- caps.

Vinod Nair, Head of Research at Geojit Financial Services, says: “The year saw a strong recovery amid continuing challenges from Covid-19 variants and ended positive today. India outperformed most global peers thanks to robust retail participation, economic recovery, vaccine coverage and rising appetite for Indian goods and services.”

Going forward, 2022 appears set to prove the naturalist and purist ways of analysing the stock markets wrong. To a naturalist, India’s stupendous market rally last year seemed puzzling as the country battled a devastating Covid second wave and consequently the effects of an economic downturn for the large part of 2021.

The government beating down its own revenue estimates for the first time in several decades, additional fund flow from 5G spectrum auction, planned stake-sale in the country’s largest insurance company LIC, massive expansion of budgeted spending, price-to- earnings (PE) re-rating of a large number of companies will remain the dominant theme for a better part of 2022.

Naveen Kulkarni, Chief Investment Officer, Axis Securities said, “Year 2022 will be a little more volatile but will still be very good for equity investors in India. It is very likely to be another year of good double-digit returns and continued wealth creation. Auto, banks, and capital goods, literally the ABC of equity markets, will be the most interesting sectors.”

Expansion of Budget

Annual budget announcement in February 2022 is expected to be the first major trigger for the markets since the government is expected to have collected 200 per cent more in taxes than its own estimates during FY22 and the Finance Minister could announce a massive expansion of the Budget. This will be closely followed by elections in two large States of Uttar Pradesh and Punjab.

According to Credit Suisse, 30 per cent of Nifty index constituents still offered a potential for expansion of valuations. Further, it says 76 per cent of Nifty companies will witness return on equity (ROE) expansion in the next two years compared with the pre-Covid three-year average - net bullish.

Kotak Mutual expects the next financial year earnings growth to be around 20 per cent (year on year) based on operating leverage. This results in forward PE of nearly 20 times for FY23.

Historically, Nifty has peaked at around 30 PE, which shows there will be ample room for stock price appreciation in the next year. Also, Kotak says that India’s current market-cap to GDP ratio was around 112 per cent against historical average of 76 per cent. Although it looked high, the global average is 138 per cent, making India’s markets still reasonable, Kotak says.

COMMENT NOW