Mr. Dhiraj Relli, MD & CEO, HDFC Securities
What a year 2021 has been... The globe recovered from the Covid pandemic but faced another round of virus spread in March. However resilient Nifty kept rising through the year till October and then saw some decent correction. Globally and in India the Marketcap on GDP ratio touched an all-time high due to large liquidity flows, low-interest rates, the expectation of early return to normalcy and low returns from other asset classes.
Vaccination programs were implemented in India amidst a lot of challenges. However Omicron variant is now threatening to derail the progress. Going by initial indications, it seems milder though communicable very fast.
Inflation continues to remain a key concern going ahead. Commodity prices (including crude oil) remain at high levels (post a small correction) due to supply disruptions and large demand to refill inventory levels. The US spend on Infra, social spend (once the $1.75 trillion bills are passed) could be a big demand driver across the globe. Globally households are sitting on trillions of dollars of excess savings, thanks to the pandemic stimulus, enforced frugality during the lockdown and high asset class returns across the board.
Covid variants, sticky inflation, Fed lift-off of stimulus and raising rates faster than expected, China's regulatory crackdown, China Taiwan issues, a run on emerging markets, hard Brexit, a fresh euro crisis, and rising food prices in a tinder-box the Middle East - are concern areas for the global economy and markets.
Transition to 2022 will see a more normal monetary policy, and investors could do well to expect more moderate returns from financial markets. Central banks will start to raise rates but remain more tolerant of inflation. Central banks and their assessment of economic conditions will likely be front and centre once again in shaping investment strategies in 2022.
Post a super show in 2021, valuation levels in Indian equities could make most people cautious on India within EMs and Asia. Indian equities are running into many challenges, including the US rate cycle, rising oil prices, elections in key states, potential Covid wave 3, upward inflexion in domestic interest rates, rich headline valuations and strong relative trailing performance.
However, the Indian market still has potential to positively surprise, as a macro construct (GDP growth, tax collections, flush liquidity, the start of a Capex cycle, a listing of start-ups leading to risk-on sentiments, supportive monetary policy, better than expected pace of macro recovery post-pandemic, likely inclusion of Indian bonds in the global bond index by Q2FY22 and strong vaccination drive) and earnings remain largely supportive.
Markets can be more discerning in 2022 and hence sticking to high quality companies and maintaining your planned asset allocation remains key for a better outcome from 2022. Here's wishing you all a happy, safe and prosperous new year.