Equity markets are at a crossroads on Omicron: FPIs vs Domestic Investors, Inflation, and Expectations vs Delivery. Omicron seems to have peaked in South Africa without much hospitalisation and death rates. It is creating havoc in the US, Europe and Korea. India so far has withstood Omicron well. There is an upside to the market if it doesn’t result in a lockdown/significant disruption in economic activities.

Suppose it is the other way, then there will be a downside to the market. India’s massive outperformance over its peers in the MSCI EM index since March 2020 lows has pushed many FPIs to book profit. A few foreign brokerage houses have given short, profit-booking calls on India considering the valuation gap vs peers.

While FPIs have continued to invest in primary markets and unlisted shares, they have been selling in the secondary market in the last few months. Domestic investors who have made tonnes of money since March ’20 lows have been regular buyers. If domestic investors absorb FPI selling, there is an upside to the market. Suppose FPIs exhaust domestic investor buying; then there could be some downside. FPI selling this time is measured, unlike rapid-fire selling like March ’20.

Globally, inflation and inflationary expectations have risen. After being criticised on “transitory inflation,” the US Fed has indicated winding down excessively soft monetary policy by reducing bond-buying and undertaking policy rate hikes. The bond market is betting against that by making a flat yield curve. If inflation is persistent and elevated, the US Fed will have to take aggressive action, which can adversely impact US and global markets. However, if the bond market prevails or Omicron forces the US Fed to ignore inflation and focus on growth, there will be an upside to the market.

Omicron, global inflation and FPI activity, or some other factors will continue to impact the market in the near term. Markets will be keenly watching December ’21 quarterly results and the Budget. Corporate Profitability to GDP ratio had fallen from mid-single-digit in FY08 to low single-digit in FY20. It has started an upward journey since then. The Street will keenly watch quarterly results for continuity of that trend. We believe the results will be ahead of expectations and provide downside protection to the market. FY22 budget provided a healing touch to the economy. FY23 budget has to accelerate growth and support equitable distribution. Better-than-expected quarterly results and a pro-growth Budget will make markets more attractive for investors.

Stock selection will be vital to making money in CY22. There are a few pockets of excess valuations. It will be rewarding to avoid expensive stocks with low-floating stocks and concentrated holdings. We believe a few themes can give outperformance in CY22 and beyond:

Industry leaders will outperform smaller peers as the strong become stronger and the big become bigger.

A company doing faster and better adoption of the digital ecosystem than peers will be an outperformer.

Home improvement, engineering, capital goods and pharma companies could outperform the market.

It will be appropriate to moderate return expectations as it is a reasonably priced market. We recommend investors to maintain a neutral allocation to equity as an asset class, be marginally overweight on large caps and marginally underweight on small/mid-caps. We expect market to remain a “Buy on Dips market”. There will be volatility/corrections, which an investor will have to capture through disciplined asset allocation.

Tighten your seat belt but don’t leave the roller coaster. The ride will be enormously enjoyable.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *