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Betting on the right sectors and selecting superior stocks with a good risk reward ratio will help generate alpha in 2022. 

The rebound from the lows last week set the stage for a ‘Santa Claus Rally’ as sentiments in Indian indices remained optimistic. 2021 was a splendid year with Nifty 50 soaring over 24%. Interestingly, in the last decade of 2010 to 2019, whenever Nifty has delivered gains in excess of 15% in a calendar year, the following year has been a dud.

For instance, a 27.70% increase in 2012 was followed by a subdued 6.76% return in 2013. Similarly with 31.39% returns in 2014, the succeeding year was a letdown and declined by 4.06%. Presently, Nifty50’s forward P/E still indicates rich valuations and over  70% of the top 500 stocks are trading above their 5-year average price-to-book ratio. Is this high valuation a sign that history will repeat itself and that investors should be bearish heading into 2022? It seems unlikely!

This time, India’s narrative is quite strong, both in terms of macroeconomics and the fundamentals of India Inc. Benefits from government reforms such as the PLI, the National Monetization Pipeline, and Make in India will further catalyze growth. GST collections are around all-time highs, the shift to digital is facilitating transparency and consistency, resulting in the biggest structural shift towards an organized way of doing business.

Corporate India’s balance sheet has been repaired, and asset quality issues for banks are being addressed. The deleveraging by companies provides room for additional capex and the capex cycle will be accelerated further by government spending. Evolving fundamental prospects, continued government initiatives, pickup in demand and favorable sectoral tailwinds should hopefully lead to healthy returns in the Indian markets in 2022 as well.

However, as a lot of these factors have already been factored into current valuations, investors should not expect a one-way rally to the top. Investors must mellow down their return expectations in comparison to 2021. Betting on the right sectors and selecting superior stocks with a good risk reward ratio will help generate alpha in 2022.

Event of the week

Pharma stocks have been in the spotlight as a consequence of elevated concerns about Omicron, with Nifty Pharma outperforming the Nifty 50 not just this week, but for the entire month. This week’s approval of Molnupiravir, an anti-viral drug claiming to cut covid-related hospitalization or death risk in half, for emergency use in India boosted their upward trajectory.

Earlier this year, 13 companies signed a non-exclusive voluntary licensing agreement to manufacture and distribute this pill in India and 100 low and middle-income countries. While this is a very positive development, the non-exclusive nature of the agreements implies that pharmaceutical companies will have to compete for a larger piece of the pie.

Drugmakers who have backward integration for Molnupiravir’s API and the ability to quickly put the pill on pharmacy shelves will have an upper-hand. Investors could, after taking fundamentals into account, consider adding such stocks to their portfolio.

Technical Outlook

The Nifty50 index closed on a positive note and broke above the falling resistance line. The next crucial resistance level is 17,650 and a close above this level will signal a continuation of the major uptrend. However, Bank Nifty is still trading below its crucial resistance zone of 35,800. A failure to surpass this level can lead to retest of lower levels.

As long as benchmark index is concerned, the immediate support on the downside is now placed at 17,100. As long as it does not fall below 17,100, we suggest traders maintain a neutral to mild bullish outlook.

Expectations for the week

Domestic bourses may be influenced by an eventful economic calendar in the first week of 2022, starting with auto sales figures, which are expected to be mixed. Despite the near-term headwinds, the long-term outlook is largely positive, with most automakers anticipating a gradually improving chip shortage situation.

Besides that, the domestic manufacturing PMI number will be an important metric to monitor. When the FOMC minutes are released later this week, Indian markets may move in tandem with global markets as investors try to read between the lines of the Fed’s action plan. In the midst of volatility, investors should focus on the long-term picture rather than the short-term headwinds and position their portfolio accordingly. Nifty50 closed the week at 17,354.05, up by 2.06%.

(The writer is the head of equity research, Samco Securities, views are personal)