Share market selloff likely in 1st half of 2022, but bet on these stocks; here are key threats to markets

Indian share markets along with global markets will see a selloff in the first half of the year and then a bounce later as interest rates would still remain conducive for positive economic growth, said Sandip Sabharwal

Indian share market, RBI, pharma stocks Union budget 2022
Sandip Sabharwal said that in the bull case scenario the market may deliver up to 15 per cent growth this year

Indian share markets along with global markets will see a selloff in the first half of the year and then a bounce later as interest rates would still remain conducive for positive economic growth, said Sandip Sabharwal, investment advisor, in an interview with Surbhi Jain of Financial Express Online. Sabharwal said that in the bull case scenario the market may deliver up to 15 per cent growth this year while in the bear case it may remain flat with some volatility. As COVID-19 cases surge, Sabharwal noted that pharma stocks could be a contra bet for 2022. He also discussed which sectors will remain in focus ahead of the Union Budget 2022. Here are the edited excerpts.

1. With surging COVID-19 cases across the country, is it the right time to bet on diagnostic and pharma stocks?

Diagnostic stocks might have a trading rally due to Covid. However, given the fact that it is expected that Omicron is relatively mild and with vaccines, Covid could see a decline going forward. As the current valuations are high relative to growth prospects, as such longer term holding of these stocks should be taken at bigger declines. Pharmaceutical stocks have underperformed and current valuations look attractive. As such I would recommend pharma stocks as a contrarian bet for 2022.

2. Ahead of Union Budget 2022, which sectors are in focus? Where do you see them in the near-term?

Consumer demand will get impacted due to high inflation. As such to sustain economic revival the government will need to focus on infrastructure. As such Capital Goods, Infrastructure, Cement and select financial stocks should be in focus. On a risk reward and valuation paradigm also these sectors are well placed.

3. Besides Budget 2022, what are the key upside and downside triggers for Indian stock markets?

The key threats to the performance of the Indian markets are

(i) Higher inflation leading to higher interest rates which could impact the valuations especially in high priced growth stocks
(ii) Potential liquidity withdrawal by global central banks which has been the primary reason for the valuations moving up and money flowing into high yielding Emerging Markets over the last two years
(iii) Very high earnings growth estimates which creates potential for earnings misses which at elevated valuations can lead to deep market cuts
(iv) A selloff in the rupee if RBI keeps interest rates low at a time when other central banks start tightening
(v) A global equity market selloff as last year saw over $1 trillion flow into equity assets which was more than the last 20 years combined. Even 10-20% of outflows can create lot of volatility in the Indian markets
(vi) If Covid doesn’t end with the current wave and there are more waves it will impact economic growth as well as bank asset qualities

Positive factors

(i) Fiscal deficit of the government seems to be well in control thus creating potential for stimulus if required
(ii) Most companies have announced large capital expenditure plans and the infrastructure pipeline also seems to be strong which could propel fixed asset creation
(iii) The first phase of rate hikes by global central banks leads to downsides, however till rates become restrictive normally markets bounce back and that is the most probable cycle that we will see
(iv) Central bank tightening could rein in commodity price spirals which could address one of the biggest concerns of inflation
(v) FDI flows are very strong and can contribute to economic growth prospects

4. Is it the right time for the fence sitters to get into the market, or should they wait more?

Investments should be spread out in the markets. Valuations are not cheap relative to fundamentals. It is also important to avoid high valuation highly priced stocks and focus more on value stocks for 2022.

5. Where do you see BSE Sensex, Nifty 50 and Bank Nifty going in the near to medium term?

In this context my overall view on the markets is that global markets including India will see a selloff in the first half of the year and then a bounce later as interest rates would still remain conducive for positive economic growth. The concern is only about valuations and near term froth and overvaluation. From the investors perspective we should see a comeback in value stocks this year versus growth stocks as the valuation differentials between the two are at all time highs. The bull case scenario is for a 12-15% market growth this year and the bear case is for a flat overall market with some volatility

6. When do you next see the Reserve Bank of India (RBI) hiking interest rates?

RBI needs to start hiking rates slowly for financial stability. I would think this could start after the next meeting as in the current meeting Omicron will still be a focus and they will watch for developments on that front. Ideally given the inflation outlook they need to act sooner than later.

7. What is your long-term outlook for the economy?

Given the overall reforms, inflation and interest rate outlook the growth rate should trend near 6-7% longer term. Ideally we need faster growth which would need more investments into infrastructure, control on inflation and improvement in the efficiency gains of the economy.

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