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Markets ended 2021 with over 20% gains even as coronavirus-related uncertainty and inflation threatened to knock the stuffing out of equities. Now, amid a host of emerging factors, Mint examines if there’s a bull market reprisal on the horizon this year.

Will the rally sustain this year?

Punchy valuations, likely monetary policy normalization from early 2022 and, potential short-term disruption to the economy from the covid-19 pandemic may act as headwinds in the first half of this year. However, equities are expected to outperform bonds and cash, albeit with more modest returns. But earnings growth expectations, the main driver of equity returns in mid-cycle, remain robust with upgrades likely. Consensus expects Nifty index earnings per share (EPS) to grow at 16% compound annual growth rate (CAGR) for FY19-FY23 compared to 4% in FY12-FY19.

Robust gains
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Robust gains (Mint)

Will liquidity continue to pump markets?

Markets are likely to feel the pressure of liquidity constraints in 2022 if easy money supply by global central banks starts drying up. So far, major central banks have been buying assets to supply money and keep financial conditions supportive for economic recovery. Now, they are expected to start reducing purchases. Foreign institutional investors (FIIs) bought Indian equities worth $3.86 billion in 2021, but were net sellers at $4.70 billion in October-December. Domestic institutional investors were net buyers of shares worth 97,109.66 crore in 2021.

What about other asset classes in 2022?

The rupee’s depreciation will support domestic gold prices but this may be contained given the Reserve Bank of India’s (RBI’s) forex  reserves, the possibility of a balance of payments surplus, continued flows in Indian equities, initial public offerings (IPOs) attracting overseas investors, and India’s potential global bond index inclusion in 2022, said analysts.

Will primary markets continue to shine?

The IPO pipeline continues to remain strong with 35 companies set to raise roughly 50,000 crore and another 33 awaiting the market regulator’s nod to raise about 60,000 crore. Besides, the much-anticipated mega IPO of Life Insurance Corporation of India is expected this year. In 2021, a record 1.18 trillion was raised through 63 public offerings. This was nearly 4.5 times the 26,613 crore raised through 15 share sales in 2020 and almost double the previous best year 2017.

How did Indian equities fare in 2021?

Markets saw a roller coaster ride driven by global tailwinds and optimism over India’s growth. Among emerging markets, India stood out as a favoured destination for global investors. Stocks logged the sixth straight year of gains, with the Sensex and Nifty gaining 22% and 24%—their best since 2017 when both gained 28%. BSE MidCap and SmallCap indices gained 39% and 63%. Total market capitalization of Indian stocks rose to $3.42 trillion from $2.52 trillion at the end of 2020.

 

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