Stocks log blockbuster gains, face consolidation in 2022

Although benchmark stock indices declined by 10% from their October peak, experts said that current valuations would keep sentiments muted because the new highly transmissible variant has clouded the market with uncertainty.

While the market trend might be volatile in the near term on account of a possible third wave of the pandemic in India and fragile global cues, corporate earnings, economic data and the Union budget may deliver some positive surprises in the long run.

“Indian equities are running into many challenges, including the US rate cycle, rising oil prices, elections in key states, a potential covid third wave, the upward inflexion in domestic interest rates, rich headline valuations and strong relative trailing performance,” said Dhiraj Relli, managing director and chief executive officer, HDFC Securities.

Despite several challenges, benchmark indices Sensex and Nifty gained 22% and 24%, respectively, in 2021. This is their best performance since 2017 when both indices gained 28%.

“India outperformed most global peers in 2021, supported by robust retail participation, economic recovery, vaccine coverage and a rising appetite for Indian goods and services. Despite lingering fears surrounding surging Omicron cases, the domestic market is expected to be resilient, supported by healthy long-term growth forecasts and economic reforms,” said Vinod Nair, head of research, Geojit Financial Services.

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In 2020, Sensex and Nifty jumped 15-16% in a year when equities had crashed over 20% due to nationwide lockdowns following the covid outbreak. In dollar terms, Sensex rose 20%, and Nifty surged 22% in 2021, outpacing the MSCI EM index (down 5%) and MSCI World, which rose 20%.

However, members of the BSE Midcap and BSE Smallcap indices stole the show in 2021, gaining 39% and 63%, respectively. The total market capitalization of Indian stocks rose to $3.42 trillion at the end of December from $2.52 trillion at the end of the previous year. India, which ranks seventh in the league of top 10 world markets, accounted for 2.83% of the world market cap of $121.17 trillion. In the same period in 2020, India contributed 2.44% to the world’s total market capitalization.

According to Naveen Kulkarni, chief investment officer, Axis Securities, 2021, has been a year of recovery, rehabilitation, and establishing a base for future growth. “2022 will be a little more volatile but will still be very good for equity investors in India. 2022 is very likely to be another year of good double-digit returns and continued wealth creation. Autos, banks, and capital goods, literally the ABC of equity markets, will be the most interesting sectors for 2022,” he said. Institutional flow and retail investors euphoria led the super rally in stock markets during the year.

Foreign institutional investment inflows into Indian equities were at $3.86 billion in 2021, with a net sell-off of $4.70 billion in October-December. Meanwhile, the growing participation of retail investors emerged as a stabilizing factor for the markets, with a record number of demat accounts opened in 2021. As many as 27.44 million demat accounts were created from January to November in 2021. In contrast, 10.5 million demat accounts were opened in 2020, the year when retail investor participation in equity markets began to swell.

As of November, India’s total demat accounts stood at 77.24 million, compared to 49.8 million at the end of 2020 and 39.3 million in 2019. A demat account is opened by an investor with a depository participant to invest in securities such as stocks and bonds. The securities are held in a digital format. Indian companies raised ₹1.18 trillion through IPOs in 2021, compared to ₹26,612.61 crore in the previous year and ₹12,361.55 crore in 2019. A total of 63 IPOs hit the primary markets in 2021, while there were 15 and 16 in the previous two years.