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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