Broad-based mkt rally unlikely in 2022 amid multiple headwinds: Brokerages

They advise investors to focus on quality companies as they list their favourite picks

The spurt in vaccination, fewer Covid cases (barring the 2nd wave), and recovery in economic activity led to a 22-24 per cent gain in the benchmark indices for CY21. The biggest gains in four years were not only limited to the blue-chips but were more broad-based, with the small and midcaps indices outperforming their larger peers with returns twice that of the benchmarks.
 
Barring the flattish performance in the first four months of the year and the correction around February-March and since October highs, there had been a one-way upward movement. Though the markets have recovered a bit over the last few sessions, brokerages point out that there are multiple headwinds going ahead.
 
Santosh Kumar Singh, head of Research, Motilal Oswal AMC, says:  “With sharp inflation and the Fed showing its intentions to tighten liquidity, the markets over the past couple of months have been a bit volatile; foreign institutional investors are net sellers almost on a daily basis. Hence, CY22 is starting with an expectation of tightening liquidity and increasing interest rates, and also uncertainty around Covid.”
 
In addition to these headwinds, the Street is worried about high valuations. Though correction from October highs has meant that the benchmarks are slightly less expensive than they were, even at 20.5-21.9 times their one-year forward earnings estimates, they are trading at a hefty premium to the long-term averages.
 
Dhiraj Relli, MD & CEO, HDFC Securities, says: “Globally and in India, the market  capitalisation-to-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.” If some of these reasons for the gains reverse — be it on liquidity, interest rates and impact of the new Covid variant — return expectations after three consecutive years of double-digit gains may need to be moderated. With a broad-based rally unlikely in 2022 and multiple headwinds, brokerages believe investors should be selective and discerning with a focus on high quality companies.
 
Analysts at Axis Securities say: “Current valuations offer a limited scope of further expansion and an increase in corporate earnings will primarily drive the market returns moving forward. Hence, bottom-up stock picking with structural stories would be a key to generating satisfactory returns in the next one year.”
 
While the rally in information technology (IT), pharma, and real estate is expected to continue and remains the core sectoral plays for many brokerages, one sector that could rebound is infrastructure and capital goods. Analysts pick this space, given that government initiatives on production-linked schemes, investments in infrastructure, and a rebound in private sector capital expenditure will offer opportunities for companies in this space.
 
While Bharti Airtel is the top pick for most brokerages, companies in the IT, pharma/health care, and consumer/retail segments find mention in their CY2022 lists. Here are some of the top names:
 
Ashok Leyland
 
The second-largest commercial vehicle maker could be a key beneficiary of the recovery in the economy, infrastructure spending, and higher replacement demand. In addition to the core medium and heavy commercial vehicle business, where it has been plugging product gaps with new launches, and distribution expansion, the company should benefit from traction in exports, defence, spares, and light commercial vehicles.
 
Bharti Airtel
 
The country’s second-largest telecom player with operations predominantly in India and Africa has multiple triggers going for it. While the biggest positive is the recent tariff hike of 20 per cent, lower churn and a robust network should aid profit growth. Motilal Oswal Financial Services expects  24 per cent annual growth in operating profit during FY21-24, which coupled with steady earnings growth in core markets, can lead to rerating of the stock.
 
GAIL (India)
 
The country’s leading gas transmission and distribution company is expected to benefit from strong prospects in the liquefied natural gas (LNG) segment. Analysts at Elara Capital believe LNG supply will remain tight until CY24, and GAIL is best placed in this scenario on higher margin from US LNG, and increased demand for long-term contracts for the US, Russia and Australia LNG, which will help rerate the gas marketing segment.
 
State Bank of India
 
A correction from peak levels offers investors an opportunity to buy into India’s largest public sector bank. Analysts at Sharekhan believe with a strong retail franchise and recovery in the asset quality, particularly the corporate book, the bank is better positioned than its peers to deliver strong advances and net profit growth. The robust performance of insurance, asset management, and credit cards subsidiaries will support its sum-of-the-parts valuations.
 
Tech Mahindra
 
A pipeline of large new deal wins, double-digit growth across its four key verticals, and an improving margin trajectory are positives for the stock. The company is building scale and momentum through its focus on large deals and has won $3 billion of net new deal wins over the last 12 months, says ICICI Direct Research. 5G and digital transformation services are expected to be key drivers of growth.