nilesh shah sensex 2022: tighten your seatbelt but don’t get off the roller coaster

Equity markets are at a crossroads on Omicron: REITs vs domestic investors, inflation and expectations vs delivery. Omicron appears to have peaked in South Africa without many hospitalizations and death rates. It is wreaking havoc in the United States, Europe and Korea. India has so far held up well against Omicron. There is a benefit to the market if it does not lead to a significant foreclosure / disruption of economic activities.

Suppose it is the other way around, then there will be a downside to the market. India’s massive outperformance against its peers in the MSCI EM Index since March 2020 lows has pushed many REITs to post profits. A few foreign brokerage firms have issued brief calls for profits in India given the valuation gap relative to their peers.

While REITs have continued to invest in primary markets and unlisted stocks, they have sold in the secondary market in recent months. Domestic investors who have made tons of money since the March 20 lows are repeat buyers. If domestic investors absorb the sales of REITs, there is a benefit to the market. Suppose the REITs exhaust the purchases of domestic investors; then there might be downsides. The REIT sale this time is measured, unlike the quick sale like March 20.

Globally, inflation and inflation expectations have increased. After being criticized for “transitory inflation”, the US Fed indicated that it was putting an end to its excessively loose monetary policy by reducing bond purchases and hikes in key rates. The bond market is betting against this by creating a flat yield curve. If inflation is persistent and high, the US Fed will need to take aggressive action, which can negatively impact US and global markets. However, if the bond market prevails or if Omicron forces the US Fed to ignore inflation and focus on growth, there will be a benefit to the market.

Omicron, global inflation and REIT activity, or other factors will continue to impact the market in the near term. Markets will closely monitor the December 21 quarterly results and budget. The ratio of corporate profitability to GDP fell from an average figure in FY08 to a low figure in FY20. It has started an upward journey since then. The Street will closely monitor the quarterly results to ensure this trend continues. We believe the results will exceed expectations and provide downside protection to the market. The FY22 budget brought a healing touch to the economy. The fiscal year 23 budget should accelerate growth and support equitable distribution. Better than expected quarterly results and a pro-growth budget will make the markets more attractive to investors.

Stock selection will be vital to making money during CY22. There are a few pockets of excessive valuation. It will be rewarding to avoid expensive stocks with low float stocks and concentrated holdings. We believe there are a few themes that may outperform during CY22 and beyond:

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

A company that adopts the digital ecosystem faster and better than its peers will outperform.

Renovation, engineering, capital goods and pharmaceutical companies could outperform the market.

Return expectations should be moderated as this is a reasonably priced market. We recommend that investors maintain a neutral allocation to equities as an asset class, be slightly overweight large caps and slightly underweight small / mid caps. We expect the market to remain a “dips buy market”. There will be volatility / corrections, which an investor will need to capture through disciplined asset allocation.

Tighten your seat belt but stick with the roller coaster. The ride will be extremely pleasant.


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