Market Outlook – Views on Current Events (Feb 2022)

Last couple of months has been a challenging period for equity investors globally. Even in India, while the headline Nifty 50 has shown smaller correction, the broader markets have seen significantly higher drawdowns across sectors. Off course, quite a few such reasons have cropped up including inflation, interest rate increases, crude price rise and the Russia-Ukraine stand-off among others. Notwithstanding the fact that these headwinds are serious, we try to analyze various factors with logical reasoning and data points in the attached note.

The worst seems to be discounted and though we might not have a sharp V-shaped movement, markets should start to move into positive trajectory. We continue to maintain our stand that the past two years market returns were extraordinary and will not be repeated but decent mid-teen returns over the next 3-4 years are still possible. A near-term event to be watched will be the state elections, particularly the outcome in Uttar Pradesh.

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Market Update – February 2022

The volatility and sharp swings in global equity markets, witnessed over the last few months, continued in January as well; a result of hawkish Fed commentary, rising crude and commodity prices, inflation fears, rising yields and mixed corporate earnings. Indian markets were no different. Although the year 2022 began strongly, equities saw bouts of upswings as well as pullbacks throughout the month with Nifty 50 eventually ending the month flattish. The broader markets represented by S&P BSE Midcap and S&P BSE 250 SmallCap were marginally down during January. FIIs continued to be large net equity sellers of Indian equities to the tune of ~USD 4.5 bn in January. Despite this, markets remained resilient as domestic institutions and domestic retail investors used the weakness as an opportunity to add to their investments. DIIs were big buyers with net inflows of ~USD 2.9 bn in January.

The markets went into the Union Budget 2022 light and with low expectations. With 5 upcoming state elections, there were concerns that the Budget would be largely populist. However, announcements were positive for economic growth with focus on capital spending and private sector Capex. The revenue estimates seem to be conservative and hence we believe government borrowings may be below the estimates. With interest rate hikes getting factored in and global markets also showing signs of stabilizing, Indian markets also should stabilize with an upward bias.

With budget behind us, market focus will now move towards UP elections scheduled in March. The initial polls seem to be pro ruling party and if there are no surprises here UP elections can be a positive trigger. FII flows have been sharply negative in the recent past. However, we expect flows to start turning positive with growth rates in India looking surely strong. Corporate earnings growth trajectory also looks strong and valuations though not cheap, are not excessively expensive too.

We remain constructive on the Indian markets but clearly continuing to focus on fundamentals, earnings, and earnings growth. New age companies have created great businesses. But for most of them their valuations and constant cash burn makes us believe that they are not suited for public market investors and are best avoided.

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Market Update – January 2022

The volatility observed in recent months continued in December 2021. Nifty 50 gained ~2% in the final week of 2021 after remaining under pressure throughout the month. Broader markets selectively did well with S&P BSE Midcap and S&P BSE 250 Small Cap gaining ~1% and ~5% respectively. Volatility was led by news on spread of Omicron variant of Covid-19 in various countries and chances of the third wave in India. FIIs recorded the longest selling streak in last 10Y (26 days) with them being net sellers to the tune of ~USD 1.7 bn in Dec. Despite this, markets remained resilient as domestic institutions and domestic retail investors used the weakness as an opportunity to add to their investments. DIIs were big buyers with net inflows of ~USD 4.3 bn in December.

As we move into CY2022, immediate focus, apart from Covid, will be on earnings and expectations from the Union Budget. We expect companies to positively surprise on the topline on back of strong festive season and the pent-up demand post lockdown. On the earnings front, we feel 3QFY22 can be a repeat of 2QFY22 with quite a few companies reporting lower margins due to input costs pressures. However, strong revenue growth should ensure that absolute profitability will be in line. Earnings outlook for FY22 and FY23 continues to be strong and the Union budget is expected to be pro growth and that can add to enthusiasm in the economy and the markets.

Overall, our view on Indian equities continues to be optimistic for CY2022. While return expectations have to be more rationale compared to the last 18 months, we do believe the CY2022 will need more hard work in picking the right stocks and segments.

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