As stock prices scaled new highs and benchmark indices kept climbing to record highs, 2021 not only defied the normal, but also scripted a new normal. Growth in the equity market was broad based and most sectors participated in the rally. An indication of the broader market’s robust performance lies in the fact that while the BSE Sensex generated returns of about 20 per cent during the year, the BSE large cap gained 22.5 per cent, midcap index advanced 36 per cent and the small cap index gained 57 per cent.
The key factors driving the market to new highs were: strong global liquidity, improved economic activity, significant pick-up in vaccination in the second half of last year, easy monetary policy and recovery in corporate earnings, besides increased retail participation in equities as new investors thronged the market to partake in the strong bull rally. Gains were not uniform across sectors though: FMCG, auto, banks, finance and healthcare were the laggards, generating lower returns as compared to the Sensex, while power, metals, realty, information technology and capital goods were the top performing sectors.
Over the last two years, the market has been quite generous and investors are curious about the market’s future in the new year. So, what’s the outlook for the equity market in 2022? First and foremost, the factors that worked for the market and investors for nearly two years may not remain favourable for them this year, given that the massive rally from the lows of March 2020 was primarily driven by massive stimulus packages by global central banks with low interest rates. This is likely to change, as central banks across the globe are expected to rein in the easy liquidity that created bloated valuations across asset classes. As a result, markets are likely to witness a lot of volatility.
Since the factors that favoured a global rally are not favourable anymore, sentiment around growth, inflation and Fed tapering is expected to cap the market's upside potential. Inflation will force central banks to raise interest rates. In mid-December, Bank of England raised interest rate by 0.15 per cent and in 2022, the US Federal Reserve is expected to raise interest rates a few times, if inflation persists. Therefore, the vertical rally of the last 18 months is unlikely to have enough legs to sustain newer highs, given that the valuation cushion is missing now. Shallow corrections, a constant feature of the bull rally so far, may also not be enough for a sustained pullback.
This however, does not mean that there will not be tie-back rallies, as is happening now. Over the last fortnight, the stock market has rallied, with the benchmark Sensex regaining the 61,000-level. The rally has come at a time when Omicron cases are surging across the globe and fresh restrictions are being put to tackle the pandemic. The ongoing rally is being powered by the return of foreign portfolio investors (FPIs), who were sellers in the last three months. They had pulled out more than Rs 35,000 crore between October and December amid indications that the US Fed would tighten monetary policy to tackle inflation. Recently, the Fed has also indicated that it might raise interest rates at a faster rate to counter runaway inflation.
While bouts of high volatility are not ruled out, the next direction to the market would be determined by the flow of FPI money, support from domestic institutions and participation from retail investors and mutual funds, as the financial system is said to be still flush with liquidity. However, experts are divided over the next direction of the market: while some are of the view that the market will make new highs and set new records in 2022, there are naysayers who believe that the market will remain under pressure because of the withdrawal of global stimulus and rate hikes by various central banks. Historically too, NSE Nifty data suggests that the market is set for a new high, as well as a sustained correction.
While anticipating high volatility in the stock market, driven by changing expectations around macro factors such as interest rate increases and India’s economic growth outlook beyond pandemic, global financial services group Nomura has setaNifty50 target of 18,150 for December 2022. This means the market at theNSEindexby2022-endmaybewhereitis today. According to Mazhar Mohammad, founder and chief market strategist at Chartviewindia.in, there have been at least two occasions when the market behaved the way it has in the last 18 months: a huge up move with shallow corrections.
After the crash caused by the global financial crisis in 2007, the Nifty consistently rallied for eight quarters. A similar rally was witnessed between2013 and 2015 for six quarters. On both occasions, there were no intermittent corrections during the up move, but once the top was made, the market underwent multi-quarter corrective and consolidation phases. Based on this historical behaviour, Mohammad says the Nifty should remain a muted performer and may undergo a multi-quarter corrective and consolidation process in 2022, with a deep correction of around20per cent. However, he does not rule out an alternative scenario in which it could register a new high, which would again pave the way for a multi-quarter correction of around 20 per cent from the top.
On the other hand, market veteran Raamdeo Agrawal, co-founder of Motilal Oswal Financial Services, is of the view that the market will fall by 15 to 20 per cent before recovering on the back of bullish earnings, especially in the banking and infotech sectors. His advice to investors is to stay in the market even if it is volatile and in a correction mode. So, brace for volatility, may be a new high, consolidation and correction.
(The writer is an independent Mumbai-based senior journalist)