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Market returns will be back-ended in 2022, as the positives of an economic revival and earnings growth are largely priced in, according to analysts.

Inflation, monetary policy normalization and Omicron may derail the equities rally, analysts said. Weakness in earnings delivery could also severely affect investor sentiment, forcing a re-rating of stocks, analysts warned.

“We think the main risks to our hypothesis of moderate performance of Asian markets could come from faster monetary policy normalization than the market anticipates, new variants of covid forcing governments to implement lockdowns and/or social restrictions again, and supply-chain constraints lasting longer than we anticipate. Finally, US-China relations have been a source of worry for financial markets for the past three years and any escalation could lead to further pressure on risk assets," said Manishi Raychaudhuri, head, APAC equity research, BNP Paribas.

Emerging markets could underperform developed markets as the US Federal Reserve’s tightening drives funds to safe-haven assets, Raychaudhuri said. He forecast a slight derating for India and all other markets to trade at their current price-to-book-value levels.

The Indian benchmark indices, Sensex and Nifty, gained 22% and 24%, respectively, in 2021, outperforming global indices. In dollar terms, the Sensex rose 20% and Nifty surged 22%, while MSCI EM index was down 5% and MSCI World was up 20% in 2021.

Supply constraints may morph into an export-led demand downturn from mid-2022, while low inflation supports monetary policy gradualism, said Nomura. “Relative to consensus, we are more positive on Singapore, more negative on South Korea and Philippines; we see macro risks in Indonesia and India. Overall, we are cautious on Asia’s economic outlook for 2022," it said.

The stickiness of inflation is the key macro concern emerging for India, Nomura said, as the brokerage firm expects average retail inflation to be higher, at 5.6% in 2022, for the third year of inflation above the 4% mark.

The positive economic growth momentum of the past few months is expected to continue well into 2022, though the pace could moderate if energy import prices (crude oil, gas, coal, fertilizer and palm oil) remain high, Credit Suisse said.

“As India’s price-to-earnings premium to global equities is already high, further PE expansion may be unlikely. Market moves are likely to follow the direction of change in FY24 earnings. In contrast to the steep downgrades that markets were used to in the pre-pandemic period, earnings forecasts for FY22 and FY23 have seen upgrades, and the same should occur for FY24. The main risks to this outcome remain global, as a slowing global economy could imperil prospects of several globally-linked sectors," said Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India equity strategist, Credit Suisse.

New covid variants, rising global commodity prices, faster tightening by central banks of developed nations and vaccine hesitancy are a few risk factors, said BofA Securities analysts. Besides, the Reserve Bank of India’s monetary policy normalization and elections in key states will be keenly watched in 2022. Assembly elections are expected in seven states, including Uttar Pradesh.

Earnings rollover in the next few months can offset the headwinds of higher interest rates, said analysts at Kotak Institutional Equities Research. Market valuations are quite full with the Nifty trading at 23.9 times FY22 EPS and 20.5 times FY23 EPS after factoring in 34% and 16% growth in net profits in FY22 and FY23, they said.

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