What should Investors Focus on in CY2022

17 Dec 2021

Citi economist recently revised FY22 GDP growth forecast up to 9.8%. However, they also highlight that there are risks to the downside – potential Omicron Covid wave and intensification of recent rural consumption weakness. So what are some trends and drivers that investors should watch out for in the Indian Markets in CY2022.
Key Points appended below.

• 1. Pace of recovery: Daily new Covid cases at their lowest in almost 18 months albeit vaccination momentum has slowed down in the last couple of months. The QoQ growth is waning in rural consumption while activity is picking up on urban consumption with sharp improvement in contact-based services.
• 2. Capex cycle and credit growth: Multiple drivers leading to gradual capex cycle such as 1)real lending rates remain well below trend, 2) decent private sector earnings growth, 3) strong profit growth in most capex intensive sectors, 4) favorable policy environment - corporate tax rate cuts, PLI schemes, public infrastructure push etc, 5) Improving asset quality of the banking system. Capacity utilization is also improving as economy recovers.
• 3. Less Supportive global backdrop: Global GDP/EPS upgrade cycle seems weak amidst fear of Fed rate hikes & tapering while a stronger dollar will need to be monitored. Post a record FY21 on FII flows ($37b inflows) - FY22 received tepid YTD FII flows at US$2b. Crude could be supported near term although medium term outlook is muted.
• 4. Earnings and Valuations: Consensus earnings are high and above multiyear trend at ~40%/18% for FY22E/FY23E. Watch out for 1) Uneven demand recovery , 2) input cost inflation across industries - pricing power to be monitored, 3) Rising Margin pressures due to increasing discretionary cost, 4) Volatile sectors driving earnings .Earnings upgrades have stalled in recent months post the big upgrade cycle in 3Q & 4Q of FY21. India's absolute (1.5sd) & relative to EM valuations (2sd) are both well above mean.
• 5. Domestic Flows – Strong DMF and Sluggish FII’S: Domestic flows have been a key support for the markets, but any pullback could test resilience DMFs direct retail participation has been very strong – driven by the low deposit rates and the ongoing shift of savings into equities. There has been lack of returns in gold and property (traditionally big avenues of retail investment) and MF industry raised investor awareness which is reflected in the consistent increase in SIP inflows below.

Summary: Citi analysts maintain their view of a limited upside with Dec'22 NIFTY target of 17,500. India's absolute (1.5sd) & relative to EM valuations (2sd) are both well above mean. Post this recent pullback, CISI is in Neutral territory, implying limited returns over the next 12m. In the Medium term - domestic flows could remain strong given lack of investment avenues.

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