2022 will prove the naturalist and purist ways of analysing the stock markets wrong. To a naturalist, India’s stupendous market rally last year seemed puzzling since the country kept battling the vengeful second wave of Covid and, consequently, the effects of an economic downturn for the large part of 2021. Still the Sensex scaled two milestones — 50,000 and 60,000 — last year. Inflation, higher valuations and interest rate hike are now the buzzwords of 2022. But the stock markets will keep springing surprises in the new year, experts told BusinessLine .
Record revenue collections
Government beating its own revenue estimates for the first time in several decades, additional funds flow from 5G spectrum auction, stake sale in 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. November and December 2021 saw heightened selling of stocks by foreign portfolio investors (FPIs) but their return to markets could keep the sentiments buoyant since further room for them to continue selling was scarce, experts say. A clear indication to this was the fact that Rupee appreciated against the Dollar for 10 consecutive sessions post December 20.
The annual Budget announcement in February 2021 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 anticipation during the current financial year and the finance minister may announce massive expansion of her Budget, which will be closely followed by elections in the two large States of Uttar Pradesh and Punjab. If the ruling BJP retains UP (most likely) with the same gusto of 2017, plus or minus a few seats, it will boost market sentiments. A strong win for BJP in UP could make it a favourite to win the 2024 national elections with a clear majority.
‘ROE to expand’
According to stock market research firm 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.
Kotak Mutual expects the next financial year (FY) 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.
Stock pickers market
Past few years have seen the narrative in stock markets shift to derivatives trading to gain a quick buck.But if 2021 can be used as a rare view mirror, identifying multi-bagger small and mid-cap stocks could be the name of the game in 2022. If PE expansion is India’s story then quality small and mid-cap stocks could give you the stellar returns since 80 per cent are trading at poor PE multiples. Before the bull runs of 1992, 2001 and 2008 ended it was the small and mid-cap stocks whose PEs rose substantially in 3-4 years. In 2021, Indian markets gave some of the new listings obscene PE premiums but did not look at already listed quality companies.
The debacle of Paytm was a reflection of such frenzy. On the other hand, a sharp rally in few of the Tata Group stocksthat fall in the small and mid-cap category(some of which gave 5x return in 2021) could be an indication of what awaits the markets in 2022, experts say.
For those who want to play the corporate theme, sticking to stocks of Tatas, (Mukesh) Ambani and Gautam Adani group could still bear fruits. Two out of the three top listed telecom companies had declared in 2021 that their businesses would turn into NPAs but nothing like that happened. If the sharp up move in telecom stocks between October and December 2021 on the back of tariff hikes is any indication, the sector seems to be out of the woods.
Net-net stock markets could remain bullish for the first half of 2022 until Nifty PE hits 30, lockdowns return, India China border skirmishesescalate or the US Federal Reserve decides to accelerate its interest rate hikes more than the current projections.