Sensex navigates geopolitical volatility to outperform global peers in ‘year of many crises’
After two years of a liquidity-fueled bull market, the BSE Sensex faces a moment of reckoning in 2022 as Russia marches into Ukraine and the Fed goes all-out in its war on inflation, a catastrophe sweeping global financial markets.
The aftershocks of the COVID-19 pandemic combined with geopolitical turmoil, supply shocks in energy markets and synchronized monetary tightening by central banks around the world mean the global economy is mired in an ever-tangling “multi-crisis”.
However, the unwavering confidence of domestic investors left Dalal Street relatively unscathed, with India’s benchmark index poised to shrug off hints of pessimism.
After a slump for most of the year, the Sensex is picking up momentum as the festive season approaches. It closed at an all-time high of 63,284.19 on December 1.
However, hopes for a year-end Santa Claus rally were dashed as rising COVID cases in China sparked fresh fears of a global pandemic wave, sending bulls scrambling for cover.
The Sensex is up just 1.12% so far this year (as of Dec. 25), but remains the world’s best-performing large market index.
Indeed, in this brutal year, none of the major global indices have managed to rise, including the Dow (down 9.24% so far in 2022), the FTSE 100 (down 0.43%), the Nikkei (down 10.47%), Hang Seng (down 15.82%) and Shanghai Composite (down 16.15%).
The relative outperformance was largely attributable to domestic retail and institutional investors, who remained confident and absorbed record sell-offs by foreign funds despite the barrage of negative headlines.
Compared with the scare of the global financial crisis in 2008, when FIIs hit the exit button, the Sensex plummeted more than 50%. Foreign institutional investors (FII) have pulled a record 12.1 trillion rupees out of Indian equities by 2022, in tandem with Fed rate hikes, sparking outflows from emerging markets, including India.
In contrast, domestic investors showed the keen intuition of market veterans and “buy on dips”.
As of March 31, 2022, the shareholding ratio of retail investors in NSE-listed companies reached a record high of 7.42% (approximately Rs. 19 trillion).
Mutual fund investments through systematic investment plans or SIP route are also on the rise despite market volatility, hitting a record high of Rs 13,306 crore (equity and debt components) in November.
This pushed the assets under management (AUM) of 43 MF industries to an all-time peak of Rs 404.9 trillion by the end of November.
India’s strong fundamentals and robust corporate performance are another positive for stocks as the global economy teeters on the brink of recession.
“November GST collection topped Rs 14 lakh for eighth month in a row, while e-way bill generation has remained above Rs 7 crore since March 2022. Other economic indicators such as GDP and PMI have been affected by the pandemic. It is also recovering well,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.
He added: “India’s outperformance was driven by corporate earnings registering a CAGR of 24% in FY20-22 and higher capital spending by the central government, which has revived the Indian economy from the COVID-induced slump. “
While many investors took advantage of these feel-good factors, a significant number gained nothing but valuable lessons.
One such lesson is that narrative is no substitute for cash flow, as evidenced by the many new-age tech companies that will be the biggest fortune breakers in 2022.
The likes of Delhivery and Tracxn are making their debuts in 2022, following the high-octane IPOs of Paytm and Zomato last year that were heralded as the age of Indian startups. All of these companies trade at discounts ranging from 15% to 70% to their listing prices, wiping out tens of millions of dollars from investors.
In fact, Paytm has earned the reputation of being the worst-performing mega-IPO globally in a decade.
Businesses that seemed “disruptive” or “innovative” when credit was cheap and plentiful suddenly morphed into costly liabilities as interest rates soared.
The collapse of Big Tech in the U.S., which saw Alphabet, Amazon, Meta and other tech giants lose a staggering $5.6 trillion in market cap, reverberated through global markets, denting valuations and investor egos.
Domestically, in the face of a challenging business environment, it is difficult for even well-known companies to justify high valuations.
Market heavyweights HDFC and HDFC Bank surged 10% on April 4 after announcing the largest merger in Indian corporate history, but the gains faded quickly after initial optimism faded.
The same is the case for LIC, which went public in May this year following the country’s largest IPO of Rs 20,557 crore, but has underperformed and has yet to reach its issue price.
The darkening of the global macroeconomic outlook can be traced back to the Federal Reserve, the bellwether of global financial market sentiment.
The U.S. central bank has raised interest rates seven times this year, from zero in early 2022 to the current range of 4.25-4.50%. Fed Chairman Jerome Powell reiterated that its battle with decades of high inflation is not over, sending shivers down the spines of participants betting rates are near this year’s peak.
The Reserve Bank of India has also been aggressively tightening policy, raising its repurchase rate by a cumulative 225 basis points in five installments since May, bringing it to 6.25% to rein in rising prices. Although India’s retail inflation fell below the Reserve Bank of India’s tolerance limit of 6% for the first time in November, there is still a long way to go.
“Prudent monetary policy is expected to continue in H1CY23, while broad valuations remain at a premium for India, which is a short-to-medium hurdle.
Valuations in India will fall to long-term averages due to a shakeout of foreign investors and slower domestic earnings growth.
“Based on the performance of developed markets and other emerging markets, we expect moderately positive returns on average in 2023. India, as an important part of emerging markets, will benefit, although we may lag behind,” said Vinod Nair, Geojit Director of Research, Financial Services.
Those could be much-needed words of comfort for investors battered by one global turmoil after another.
(Aside from the title, this story is unedited by NDTV staff and published via a syndicated feed.)
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