A good start to the year doesn’t mean the momentum will be maintained

A key description of last month’s article was that the market consolidation between October to December 2021, has improved the outlook for equity during 2022. We did have a good start, despite a weak global market and subdued FPI inflows. This rally was supported by domestic institutions and retail investors. During January, the weakness of global markets had not impacted the Indian market however lately selling has increased but still lower than compared to other Emerging Markets. The sustenance of domestic market outperformance, in the near-term, will depend on the budget announcement and Q3 results. While the future trend will be based on geopolitical, global bond yields and pre-election trends.

Performance of global markets

 The performance of global markets has been weak, reflecting the concerns of an imminent tightening of monetary policy. Yields are rising in anticipation of three rate hikes by the Fed in 2022 and a drop in quantitative easing. This is impacting investment strategy; investors are diversifying into non-equity assets like bonds and other assets. The world economy is also concerned about elevated inflation, which will also trigger central banks to curb easy money policy. To date, during the year, this weakness in global markets has not impacted the Indian market much. We are continuing to outperform the emerging and world equity markets. And we are expected to continue our edge due to reforms and strengthening of the domestic economy. However, as we know, the world equity markets have become highly correlated, and India will face the consequences in the future as events develop. Having said that, it will be a short to medium-term effect.

All eyes on Q3 results

Start to the result season is well supported by the evergreen IT sector. The overall expectations are very solid on a YoY basis. For example, in the Nifty50 index, total constituent companies are expected to report a net profit growth of 20 to 25%, as per Bloomberg estimates. Given the robust forecasts for current and upcoming quarters, the market is not concerned about valuations. However, we should also note that the growth is supported by the low base effect and pent-up demand. Secondly, we can foresee some moderation in results on a QoQ basis due to high raw material prices (inflation), supply constraints and local restrictions. As a result, the broad economic data is tempering, noticing some slowdown in growth and profitability.

This above average forecast is supported by the commodities and energy sector due to high international prices because of supply constraints, which are expected to moderate during the year. Though the start to the season is good, an overview outlook will depend on actual volume growth, fall in inflation, and drop in supply issues.

And 2022 budget

One of the reasons for the ongoing rally, despite the weak global market, is budget expectation. Usually, budget expectations are low when key states or national elections are scheduled. Here, it is the opposite, stable government/ political scenario and the focus on reforms are increasing expectations. Most of the reforms carried out are not mention in the budget. However, it is a key platform for the government to reiterate their reformist measures and ideas undertaken during the year. The key areas of the government will be Healthcare, Infrastructure, Agriculture, Rural Market, Unprivileged sections, Manufacturing in India, and Hospitality. Given the key upcoming state elections, populist measures are also expected but it is unlikely to impact the long-term fiscal deficit. Due to high inflation, tax benefits can be given to low-income bracket taxpayers. In a nutshell, the budget is expected to be positive for the economy. However, it is unlikely to define the trend of the equity market. From the sectors highlighted above, the key beneficiaries will be Capital Goods, Infra, Manufacturing and Consumption.

 Election year

 In a large democratic nation, election is an important factor that defines the trend of the equity market in the short to medium-term. Most important is the national election. But we have 5 states elections in 2022, which will be completed in February-March. It is presumed to be a precursor of the national election to be held in 2024, given key states like UP and Punjab are having state elections this year. That is why the market is a bit concerned whether the budget measures will become very populist.

We can assume some freebies focused on state elections are for common people, but it may not impact the country’s fiscal position. The market expects the outcome of state elections to be stable for the central ruling party based on preliminary pre-election views and ratings. However, concerns regarding uncertainties in northern areas due to farmers’ protest and impact on the poorer sections due to the pandemic will have an effect. Post-budget, this will be a key area of discussion for the market, and this may impact the performance in the short term. Further, the medium-term direction will depend on the final outcome.

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