Dalal Street beats global peers for a second financial year in row

Indian markets outperformed their global peers for a second financial year in row, with the benchmark Nifty50 rising 19 per cent in financial year 2021-22 (FY22). In comparison, the MSCI Emerging Market (EM) fell 13 per cent, while the MSCI World gained 10 per cent. Equities also outperformed gold, which rose 13 per cent.

However, the gains were muted compared with the previous financial year, when the market soared 70 per cent, thanks to the sharp rebound from Covid-19 lows.

The post-pandemic stimulus measures and low interest rates saw the Nifty gain as much as 26 per cent to touch a fresh lifetime high in October. However, the unwinding of the stimulus due to inflationary pressures has seen the index give up some gains in recent months.

“Domestic equities witnessed a roller-coaster ride in FY22 influenced by various factors globally and as well back home. On the positive side factors, like the reopening of the economy, healthy macro data and strong corporate earnings lifted the Nifty to a new high of 18,604 in October 21. However, concern over rising inflation, tightening of monetary policy by central banks, uncertain geo-political environment over Russia-Ukraine conflict and volatility in commodity prices kept the market gains on check,” said Siddhartha Khemka, head —retail research, Motilal Oswal Financial Services.

Notably, the gains made in FY22 came despite a sharp pullback from foreign portfolio investors (FPIs). After pumping in a record Rs 2.7 trillion in FY21, FPIs yanked out Rs 1.44 trillion from domestic stocks in FY22, with most of the selling coming since October.

Despite that, the market has come off less than 6 per cent from its peak thanks to the support provided by retail investors and domestic mutual funds (MFs), which have pumped in Rs 1.74 trillion in FY22 thanks to sustained flows into equity schemes.

“The only factor for the market to hold up in FY22 was the support of retail investors. In other years, when FPIs sold aggressively, markets corrected in a big way,” said Ambareesh Baliga, an independent market analyst.

Commodity driven sectors such as metals and energy outperformed along with IT, while consumer goods stocks, auto and financials underperformed. Mid- and small-caps also outperformed for a second year in a row.

Experts believe returns could taper further in FY23 in the wake of several heawinds. In a note, Emkay Global said it expects the Nifty to rise 10 per cent and corporate earnings to grow 20 per cent in FY23. The increase in crude oil and other commodity prices, and monetary tightening are major challenges in the next 12 months, it said.

India’s gross domestic product (GDP) growth in FY23 is projected to be among the fastest globally. However, rich valuations limit the upside for the market. The Nifty’s price-to-earnings (P/E) multiple has come down from 22 times in September to 19 times at present.

However, this is still above the long-term average of about 17 times.

India’s premium to other EMs is also high compared to historical levels. As a result, FPIs have shifted focus to other markets that stand to gain from the jump in commodity prices.

“FMCG will be affected by crop and oil inflation, and cement will be impacted. What remains safe is pharma, IT, and oil and gas. The continuing entry of retail investors will also ensure the interest in mid- and small-cap stocks will continue,” said G Chokkalingam, founder, Equinomics.