Calendar Year 2021 was a year full of surprises. Some of the most unexpected major events unfolded with positive surprises during the year. Many events closed on positive notes as well.
There were very few expectations from the Union Budget this year but overall it turned out to be a positive one and the RBI focused on spending and capex, rather than just on the trade deficit. The market was extremely concerned about the potential impact of the second wave of COVID 19. However, it proved to be less adverse for India as compared to the developed markets.
Kotak Securities said, After a better-than-expected Q1 results, the market took a real take-off and intensified after the Q2 results. It was also a unique year for FII/ FPI investments. From April to the first week of December 2021, FIIs sold Rs 1,200 billion, while domestic companies bought more than Rs 1,000 billion. The flow of FDI in equities and debt markets continued, helping the Indian market in the long-run.
We also saw a massive fall behind due to several headwinds in November and December 2021. The market fell more than 10 percent on the back, because of growing cases of COVID-19 in developed markets, concerns over the new Omicron variant, speedy withdrawal of incentives from the US and expectations of accelerating rising interest rates.
We estimate GDP growth to be impressive even in FY23E at 8.1 percent followed by a more normal print of 6.5 percent in FY24E after 9.5 percent in FY22E. Consensus is building around an investment revival across (1) government (choosing growth over consolidation), (2) private sector (stronger bank and corporate balance sheets, hopes of higher capacity utilization, new economy manufacturing), and (3) household real estate (low interest rate regime, aspirational shifts).
GDP growth would be primarily investment driven given that (1) the external sector may not be supportive for long, and (2) consumption prospects may not be bright given sustained and unequal COVID impact on household income.
RBI likely to tighten policy
With expectation of impressive GDP growth, we expect RBI to tighten policy as follows:
(1) Normalizing the policy corridor (from February 2022),
(2) sterilizing incremental durable liquidity surplus,
(3) changing monetary policy stance to neutral, and
(4) 50 bps repo rate hike (from late1HFY23).
We expect 10-year yield around 6.5 percent by end FY23E.
Two major risks to growth
There are two major risks that will continue to weigh on global and domestic growth in FY23E:
(1) COVID waves as is being seen in various economies and further mutations to the virus and,
(2) Supply-chain issues believed to be continuing for another 6-9 months weighing on global trade and growth.
Nifty 50 Index net profits may grow over 34%
In terms of earnings, we expect net profits of the Nifty- 50 Index to grow 34.5 percent in FY22E, 16.0 percent in FY23E and 13.3 percent in FY24E. Reading of high-frequency indictors including GST collection, e-way billing, IIP, freight & consumption across sectors for recent months are also encouraging which bodes well for the markets. Currently Nifty 50 is trading at valuation of 24.8x FY22E, 21.4 FY23E and 18.6 FY24E earnings.
Though valuations look rich in isolation, the strong earnings growth in many stocks and sectors provide investment opportunity. Also the recent market correction provides investment opportunities in quality large-cap and mid-cap stocks.
For the Q4, we are expecting BFSI, Metals, Mining and Oil & Gas to do well, however, in the coming FY23 we would expect incremental growth primarily from Automobiles, BFSI, Technology and Oil & Gas
We expect Nifty EPS of Rs 722 in FY22E, Rs 840 in FY23E and 959.5 for FY24E and Nifty Target:
Best Case is 21109/69600 (22x FY24E); Base Case is 19190/63800 (20x FY24E) and Worst Case is
17271/59500 (18x FY24E).
Commodities
1. Economically sensitive commodities edged up in 2021 amid supply issues and improving demand outlook; gold and silver fell on stronger dollar.
2. Gold may continue to remain supported by the slow and uneven economic recovery and persisting virus challenges. However, rising prices might be challenged in an environment where central banks and government scale back emergency stimulus given during the pandemic.
3. Silver as a precious metal might struggle following gold however; the long-term demand outlook for silver remains firm with its increasing usage in industrial application and more emphasis on renewable energy.
4. Crude oil and natural gas were amongst the best performers amid tightness in global market.
5. Important factors to be watched in 2022 for crude oil would be demand growth as economic recovery slows with normalization of stimulus, expectation of a modest surplus in 2022 as compared to a deficit in 2021 as supply growth picks up pace while demand growth slows, standoff between producers and consumers
6. Copper touched record high level above $10000/ton on robust demand outlook. Energy crisis in China and Europe pushed commodities like Aluminium and Zinc to 2008 and 2007 highs respectively. Cotton rallied to decade high on strong demand recovery against lower stocks.
7. Industrial metals may struggle to test 2021 highs amid slower economic activity especially in China and jump in supply in reaction to higher prices. Commodity specific fundamentals might keep prices supported.
Currency outlook
In 2021, USDINR has witnessed one of the quietest periods in a decade. It was range bound between 72 and 76 on spot.
1. Volatility is expected to increase in 2022, as major central banks around the world tighten monetary policy.
2. OMICRON remains a risk
3. State elections in UP and Punjab will shape the political narrative
4. FPI/FDI inflows may pick up during the Q2-Q3 due to LIC IPO, GOIsec's inclusion in a global bond index, and better growth prospects for Asia lead by China and India.
5. USD-INR may aim for a fresh all-time high above 77 during Q1, due to Fed tightening but from Q2 and Q3 onwards betters dollar inflows can cause Rupee to appreciate back to 75 levels.
