Premature action by central banks remains a key risk
PremiumIndia will probably be able to handle any FPI outflows better than EM peers
Making market predictions for the following year is an annual tradition that analysts have carried out probably for as long as modern markets have existed. But this task is fraught with risk because the underlying conditions change, sometimes significantly. For example, in late 2019, no one foresaw the pandemic that would set the world’s output back by a year, if not more.
For 2021, however, analysts have done better. Their predictions of a sharp economic rebound, the wide availability of vaccines, central banks staying accommodative and consumers spending from their stimuli-filled wallets have all worked. But some predictions didn’t quite pan out, including that of investors favouring value over growth stocks or that emerging markets would outperform developed markets.
Picking value worked for the first few months of 2021, but as of mid-December, US growth stocks have outperformed US value stocks by 10 percentage points. During the same period, there was little to choose from between the performances of the S&P 500, Nasdaq 100 or the NSE Nifty 50. The dollar index is higher, emerging market stocks are down by 6%, and Indian mid- and small-cap indices are up by approximately 36-58%. So, there you have it. The predictions are good only until the initial assumptions hold.
Predictable backdrop
The latest US Federal Open Market Committee (FOMC) and RBI announcements have made it somewhat easier to decide the backdrop for 2022. Easy money will most likely go away by March. Central banks will probably hike rates in small doses to counter inflation. But they will also be mindful of not tightening monetary conditions so much that growth is stifled. In fact, we do not expect quantitative tightening in the US until 2023. Demand is still generally strong, and over the next few months, supply-side issues such as the shortage of semiconductors will probably ease. There is little to suggest (yet) that the Omicron variant will change this backdrop considerably given that the number of cases, at least in India, remains low, and vaccine makers are confident that their shots will work in protecting against serious illness.
Considering the above factors, we are bullish on global growth and at 4.8% in 2022, expect it to remain well above its trend. Oil prices could rise along with this but may eventually moderate by the year-end to around $80 per barrel. Despite the rise in headline rates, we expect real rates to remain negative for most of 2022.
Solid demand coupled with negative real rates are typically good for equities and are particularly favourable for value stocks (again!), capex plays and companies with pricing power. In India, we expect the IPO (initial public offering) pipeline to remain robust and continue the trend of companies with innovative business models coming to the market.
There are fears that the Fed tapering would crash the equity markets. But we think that that will most likely not be the case as the market seems to be better prepared this time. Furthermore, our indicators show that investor positioning is already risk-averse. The main lesson from the 2013 taper exercise is that stocks tend to do well as long as monetary conditions remain supportive, and the latest Fed taper is unlikely to change them. Back then, stocks initially corrected but bounced back smartly. Thus, the key risk for the markets remains central banks capitulating to persistent inflation and tightening prematurely.
Broad-based growth
We expect India’s growth to turn more broad-based and thus expect financial and capex-related companies to perform well. We also like technology companies as a play on the global recovery given that they continue to gain market share, especially in digital areas. We are less positive on consumer companies as we fear not all of them will be able to pass on price increases to consumers without impacting their volumes. However, India will probably be able to handle any potential FPI (foreign portfolio investor) outflows better than its emerging market peers because robust domestic institutional and retail inflows could continue.
We are overweight India in our Asia ex-Japan model portfolio and have a 2022 Sensex target of 62,000. This target implies more moderate returns going ahead, but also that investors may need to be a bit more discerning with their choice of stocks in 2022, especially among mid- and small-caps.
Abhiram Eleswarapu is head of India equities, BNP Paribas.
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