Inflation, policy normalization and Omicron could derail rally

Analysts said inflation, monetary policy normalization and Omicron could derail the equity rally. Analysts warn that weakness in earnings distribution could also hurt investor sentiment badly, which could lead to a re-rating of the stocks.

“We think the main risk to our hypothesis of moderate performance in Asian markets could come from monetary policy normalization faster than markets expected, with new forms of COVID forcing governments to re-impose lockdowns and/or social restrictions. can, and supply-chain bottlenecks can be prolonged. As far as we guess. Lastly, US-China relations have been a source of concern for financial markets for the past three years and any escalation could put further pressure on riskier assets,” said Manishi Raychaudhuri, head of APAC Equity Research, BNP Paribas.

Raychoudhury said emerging markets may outperform developed markets as funds move to safe havens due to the US Federal Reserve’s strictures. He forecast a slight deviation for India and all other markets to trade at their current price-to-book-price levels.

Indian benchmark indices, Sensex and Nifty, outperformed global indices, gaining 22% and 24% respectively in 2021. In dollar terms, Sensex rose 20% and Nifty 22%, while MSCI EM index was down 5% and MSCI World was up 20% in 2021.

Nomura said the supply crunch could take the form of a decline in export-led demand from mid-2022, while low inflation supports monetary policy stagnation. “Relative to the consensus, we are more positive on Singapore, more negative on South Korea and the Philippines; we see macro risks in Indonesia and India. Overall, we remain cautious about Asia’s economic outlook for 2022.”

Inflation stickiness is an emerging major macro concern for India, Nomura said, as the brokerage firm expects average retail inflation for the third year of inflation in 2022 to be 5.6 per cent, up from the 4% mark.

Credit Suisse said the momentum of positive economic growth of the past few months is expected to continue well into 2022, although if energy import prices (crude oil, gas, coal, fertilizers and palm oil) remain high, the momentum will continue. may decrease.

“As India’s price-to-earnings premium for global equities is already high, further PE expansion may not be likely. Market movement is likely to follow the direction of change in FY24 earnings. In contrast to the sharp fall in the markets in the pre-pandemic period, earnings forecasts for FY22 and FY23 have seen an upgrade, and should be the same for FY24. The main risks to this outcome remain global, as a slowing global economy could jeopardize the prospects of many globally connected sectors,” said Neelkanth Mishra, co-head of equity strategy, Asia Pacific and India Equity Strategist, Credit Suis said.

Analysts at BofA Securities said new Covid variants, rising global commodity prices, rapid tightening by central banks of developed countries and hesitation of vaccines are some of the risk factors. In addition, RBI’s monetary policy normalization and elections in key states will be closely watched in 2022. Assembly elections are expected in seven states including Uttar Pradesh.

Analysts at Kotak Institutional Equities Research say the earnings rollover in the next few months may offset the adversity of higher interest rates. He added that the market valuation is quite full with business following a growth of 23.9 times FY22 EPS and 20.5 times FY23 EPS and 16% growth in net profit in FY22 and FY23.