Stellar 2021 for Indian stock market, what 2022 has in store

Year 2021 was one of the best in the Indian equity market, with the Nifty returning over 21% in the period. A lot of factors such as liquidity gush, robust earnings updates, FII inflows and easy monetary policy kept sentiments upbeat in the first half of the year. However, lockdowns due to the rapid spread of Covid, tightening monetary policy and negative global cues weighed on the sentiments during the later part of the year, leading the market to turn choppy. 

While Nifty gave about 21% returns, MidCaps returned about 44% while the Small caps provided about 53% return. A large percentage of the returns were distributed in a short time span. A record number of companies also came out with their IPOs during the year. A total of 62 companies have listed on the exchanges in the year, raising nearly Rs 1.20 lakh crore. The year had seen many interesting new-age businesses from Paytm to Nykaa making their debut during the year. 

IPOs: Hits and Misses

FII Inflows

With just a few days to go, FIIs invested Rs 26,001 crore into domestic equities in 2021, down 84 per cent from Rs 1,70,262 crore in the previous year. This is the worst flows since 2018, when FPI were net sellers to the tune of Rs 33,014 crore.

Macro Data points and outlook

As we get set to enter CY22, the market has turned volatile, as a lot of domestic as well as global factors have weighed on the Indian market. The global liquidity is set to go lower with the shift in US Fed stance, and that will eventually lead the RBI to follow script as well as raise rates. Most analysts are now expecting around 2 rate hikes in the next year.  Tightening monetary policies across the world, developments around the Omicron variant, and key macro data will decide the future course of the market. Here are some projections for next year. 

Source: (ICRA)

Expectations from 2022

• Equity returns may be modest: After a huge rally in 2021, equity returns are expected to moderate in the next year. The withdrawal of monetary policy stimulus, high valuations, concerns around the developing situation of Covid around the world would be the major factors to watch out for. 
• Nifty 50 earnings growth forecasted to remain strong: The earnings growth of Nifty 50 is expected to remain strong in the next fiscal year as well. According to estimates by Kotak Securities, net profits of the NSE Nifty 50 will grow at 35% in FY22, 16.0% in FY23E and 13.3% in FY24E. 
• High valuation, but select stocks offer opportunity: At present, Nifty 50 is trading at valuation of 24.8 times FY22E, 21.4x FY23E and 18.6x FY24E earnings, according to estimates by Kotak Securities. Though valuations look rich in isolation, the strong earnings growth in many stocks and sectors provide investment opportunities. 
• Expectations on FII inflows: If the government continues its reform momentum, India may continue to attract higher foreign direct investment inflows, and at the same time, financialisation of savings and robust corporate balance sheet may support a revival in capex spending, noted Credit Suisse. 

What should you do now?

• Invest in equities in a staggered manner. 
• Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the ongoing volatility 
• INDmoney’s ROBO STP can help you invest in these volatile markets
• Invest only high-quality AAA-rated bonds as they have the least risk.
• There is a significant tax advantage in holding a debt fund for more than 3 years. 
• For a more than 3-year investment horizon, an investor should prefer short duration (duration < 3) fixed income instruments over a long duration. Stick to short duration funds and bonds, as yields are expected to remain volatile in the near future.
• Avoid lump sum allocation and adopt a more staggered approach over the next few months.