Stock Market Outlook 2022: Analysts Expect Modest Returns, High Volatility
Equities rose to a record in 2021, but the rally is expected to slow next year amid rising inflation, economic disruption caused by the newer variants of the coronavirus and prolonged global supply-chain woes.
Analysts expect Indian equity markets to deliver modest returns, undergo correction and be volatile in 2022 as the Reserve Bank of India is likely to raise rates and unwind excessive liquidity support in the next few quarters to tame inflation.
Here's what analysts have to say about 2022:
2022 is likely to see markets transitioning from "early-cycle" to "mid-cycle". The withdrawal of monetary policy stimulus will define the transition to "mid-cycle", similar to 2003 and 2009 market cycles. Volatility rises during this transition, with equity returns being more modest during this phase, mirroring earnings growth.
India’s macro fundamentals remain strong. Economic growth is expected to remain well above its long-term trend, with the likelihood of further upgrades to consensus GDP growth for the year ending March 2023, as recovery broadens. Though inflation is expected to remain above the RBI’s medium-term target of 4%, it's likely to trend lower amid easing supply disruptions and normalisation of pent-up demand.
Equities to outperform bonds and cash, though we expect returns to be more modest relative to recent years.
Earnings growth expectations, the main driver of equity returns in mid-cycle, remains robust with upgrades likely.
In bonds, we maintain our preference for corporate bonds over government bonds.
Expect inflation to moderate over the course of 2022 as supply disruptions ease amid normalisation of demand, but a persistent rise in inflation could turn macro conditions unfavourable for risk assets.
Bond yields to rise on normalisation of monetary policy, but an over-tightening policy error by central banks could drive volatility significantly higher for risk assets.
Covid-19’s evolution could still see some hiccups as seen with the emergence of the new variant lately.
The phase of high returns is reaching an end, so making money is going to be challenging in the coming calendar year.
The markets will undergo some form of correction and consolidation in 2022. Investors should expect gradual de-rating of equities as bond and equity earnings yields converge.
In terms of earnings, we expect net profits of the NSE Nifty 50 to grow 34.5% in FY22E, 16.0% in FY23E and 13.3% in FY24E. At present, Nifty 50 is trading at valuation of 24.8 times FY22E, 21.4x FY23E and 18.6x FY24E earnings. Though valuations look rich in isolation, the strong earnings growth in many stocks and sectors provide investment opportunity.
There are two major risks that will continue to weigh on global and domestic growth: Covid-19 waves and supply-chain issues
Covid-19 waves is being seen in various economies owing to further mutations to the virus.
Supply-chain issues believed to be continuing for another 6-9 months weighing on global trade and growth.
As we head into 2022, the world’s major central banks have started prioritising inflation control over growth acceleration.
Unwinding of monetary policy support and reduction in fiscal support in the upcoming year may have negative repercussions for global growth as well as equity valuations. Indian equities might experience some near-term de-rating but—thanks to the improved macroeconomic fundamentals and corporate balancesheets—valuation multiples are unlikely to revert to pre-pandemic levels.
Given the substantial improvement in corporate fundamentals, the Indian equity market should continue to command a higher valuation premium, relative not only to its historical average but also other markets. Hence, despite the record-high valuation premium for the Indian market, our house view remains neutral on Indian equities.
If the government continues its reform momentum, India may continue to attract higher foreign direct investment inflows, and at the same time, financialisation of savings and robust corporate balancesheet may support a revival in capex spending.
Macro economy continues to remain vulnerable to fast-changing geopolitical equations, global macro shocks, and India’s excessive dependence on oil imports.
The recovery is not broad-based yet and the government might have to allocate higher spending toward subsidies, including for food, fertiliser, and another less impactful spending especially in light of the fast-spreading Omicron virus and ahead of the several important state elections early next year.
The spread of Omicron could lead to some near-term growth worries.