Indian stock markets have had a great run in 2021, with the market breadth being amongst the broadest in recent years. However, with the overarching narrative of rising global inflation, Fed taper, India’s premium valuations and a potential third wave, will the market do as well in 2022?
India’s GDP, which was battered by the 2nd wave, is now firmly on a growth path. If we are to go by high frequency indicators such as GST collection, e-way bills and container freight, there are clear indications that the economy is likely to do better than even the pre-pandemic trajectory. Furthermore, most GDP growth estimates are currently conservative. The current activity levels suggest that many of these estimates are also likely to be upgraded.
Even if Omicron was to cause the 3rd wave, it is unlikely to derail India’s growth story as around 90% of Indians are expected to have Covid anti-bodies by March 22. Also, since Omicron is considered to be milder than the other variants of Covid, many virologists globally are of the view that this maybe signalling the beginning of the end of Covid.
Based on the government’s impetus on infrastructure development both in the budget and the national infrastructure pipeline, there is increased spending by the state and central governments especially in the rail, road and water segments. Due to low-interest rates, healthy corporate balance sheets and favourable government policies, there is a marked increase in capex announcements by private sector companies as well.
Furthermore, credit growth, which bottomed out in April at about 5%, increased to about 7% in November. There is also a marked increase in sanctions by banks to fund corporate capex. Credit card spends at over Rs. 1 lakh crores in the month of October was an encouraging sign of a marked increase in consumer spending.
In the backdrop of all of this, we maybe sitting on the cusp of a long upcycle, similar to what we saw in 2003, when the economy was coming out of a cyclical low. We are starting the cycle with low interest rates, low debt levels and surplus liquidity. There is a confluence of four factors for a bull cycle after nearly twenty years, namely formalization, consolidation, stronger balance sheets and inflation.
In 2022, markets should their continue their upward trajectory, albeit with some hiccups along the way of some negative news flow. Investors can focus on two sectors- private financials and IT services. Healthy credit growth, along with increased risk appetite amongst banks, should aid private sector banks. As a result of the pandemic, corporations globally have accelerated their focus on transforming to digital services. This has led to an accelerated demand upcycle for Indian IT services companies.
(The author is the CIO of TejiMandi, views are personal)
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