Will capex spur the rally in 2022?

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While bullstook charge with renewed zest this week, some trepidation was observed in the mid-week as markets interpreted the Fed’s hawkish policy minutes.As the Street hunts for catalysts to drive the rally this year, it appears that India’s much-awaited capex cycle will potentially begin in 2022.Historically, during 2003-07, when India saw one of the remarkable capex cycles, markets surged by more than 6x. In fact, sectoral indices such as banking, auto, metals, capital goods soared between 6x to 23x.

The current economic picture is quite similar to the one that prevailed in the early stages of the 2003-07 cycle. In fact, certain indications are now even more powerful. For instance, corporate leverage, which was around 1.3x in FY03, is now ~0.8x in FY21, following record deleveraging. The elevated banking NPAs were one of the primary factors for the muted capex formation in the last few years. The deleveraging has further led to bottoming of banking net NPAs which have now fallen to 2.5% from 4% in FY03.

The 14-government led PLI schemes worth Rs. 3.46 lakh crores have the scope to be game-changers in boosting the manufacturing sectors.Even the savings from tax rate cuts which were earlier used to repay debt, can now be poured towards fundingincremental capex. Household capex is already ramping up, thanks to the real estate sector’s revival.

Many other factors including flushing liquidity, low interest rates, improving capacity utilisations and significant pick-up in commodity-driven sectors, imply that a similar capex trend is now possible.History suggests that if India’s dream capex cycle is actually realised, good wealth creation can follow. As a result, investors may seek for companies that can gain from the up-cycle and invest accordingly.

Event of the week

This week, Bank Nifty anchored the market’s surge as fresh interest in banking equities emerged. Green shoots have appeared, with 10 out of 13 banks reporting double-digit loan growth as per the Q3FY22 business update. Earnings momentum from Q2FY22 is expected to continue in Q3FY22, with banks reporting better topline as a result of improved collection and solid loan growth.

Going ahead, the banking sector’s quarterly results will be one to watch, as the updates have raised expectations for a better performance in Q3FY22. Furthermore, in light of recent developments surrounding the Omicron variant of Covid, it will be crucial to closely monitor management commentary from various banks on growth outlook and risk perspective.

Technical Outlook

Nifty 50 closed the week on a positive note but on last trading session, the index formed a spinning top pattern at 61.8% Fibonacci retracement of the decline from the top. On the other hand while Bank Nifty remained the top gainer among sectoral indices, the index formed a shooting star pattern on the daily chart.

These formations indicate that both the benchmark indices seem to be facing a mild resistance at current levels. Having said this, the underlying bullish momentumremains intact as long as the Nifty does not break below 17,550 levels. We suggest traders maintain a cautiously bullish outlook, as a fall below 17,750 can lead to a retest of previous support of 16,850.

Expectation for the week

The Q3FY22 earnings season will commence with large-cap IT companies reporting first. In recent weeks, IT stocks in India have outpaced the benchmark, fuelled by expectations of an increase in deals and a resultant stellar growth momentum. The sector’s major monitorables will be margin projection, revenue guidance, and attrition figures.

On the macroeconomic front, investors will be keeping a close eye on the domestic inflation rate, as well as inflation numbers for the United States and China. In contrast to other central banks, as RBI appeared confident of containing inflation in India,a higher-than-expected inflation would point to a policy rate hike sooner than planned, which can cause jitters in the market. Nifty50 closed the week at 17,812.70, up by 2.64%.