India has come out of the second Covid wave and is catching up with the rest of the world. India’s economy is recovering quickly as evidenced by strong macro data, better than expected GDP growth, improved core sector growth, GST collections of above Rs 1.30 lakh crore for the sixth consecutive month and falling unemployment rate.
Going forward, over the next three years, the fund house believes India is likely to go back to its real GDP growth trend of ~6.5% with all three drivers of the economy (consumption, investment and exports) firing.
Equity outlook 2022
Given the rally in markets in 2021, easy money has already been made.
2022 can be looked at as a year of transition as excess liquidity gets withdrawn and interest rates inch up. Markets are likely to be more discerning and stocks will be driven by fundamentals.
Talking about sectors, PSU banks and telecom could see improvement in their profitability while technology, private banks and NBFCs will continue to deliver healthy profits.
On short-term basis, correction should be looked at as an opportunity to add equity exposure but should be phased out over the next few months as the markets adjust to the policy change globally and the rebound in virus infections.
As India is continuing on the road to recovery, on a medium-to-long-term basis, the fund house continues to remain positive on equities and expects markets to continue to scale higher. Overall, the Indian equity markets can give returns slightly below earnings CAGR over the next 3 years.
With a slightly incremental correction, markets are expected to start looking reasonable from a valuation perspective. Hence, investors can expect moderate returns along with a stock specific rally in the short term. Portfolios having a slight tilt towards domestic cyclicals should do well in 2022. Also, while market returns may be modest, the breadth will continue to improve as the domestic recovery gathers momentum, thus providing opportunities for active funds to generate alpha.
Recommendations: The fund house believes balanced advantage funds are suitable for first-time investors as they provide a relatively low-risk entry strategy.
Fixed income outlook
Inflation is expected to average at 5-5.25% for FY 2022 which is in line with RBI estimates. However, the fund house perceives energy prices to continue as the biggest risk to inflation estimates. Any meaningful sudden upside poses a significant risk for financial stability and assessment of inflation ahead.
‘Financial stability’ and ‘growth’ will drive RBI’s policy considerations over inflation. Since uncertainties around ‘growth’ are more than ‘inflation’, policy normalization will continue to be calibrated like 2021. Policy normalization will induce a lot more volatility than we have experienced in the last 12 months.
As a part of policy normalization, liquidity adjustments need to happen before rate normalization and RBI has already embarked on this journey. As quantum of liquidity is significantly very large, liquidity normalization is going to take a longer time frame.
Recommendations: The fund house believes that the short end might be the better play. Risk averse investors should look to invest in the money market, ultra-short-term funds & low duration funds until more clarity on growth emerges.
Investors with longer term investment time framework can look to invest in passive strategies and short-term fund categories.
