By Narendra Solanki
The markets continue to witness volatility so far in 2022 with some session of rebound in between as inflation continues to scale higher and central banks in most countries are tightening monetary policies in a hurry to avoid falling behind the curve. The major part of the jump in global inflation has been led by supply-side factors such as supply disruptions in China due to zero Covid policy, inadequate supply of crucial materials such as microchips and bottlenecks due to Russia Ukraine war which accelerated commodity led inflation globally for both industrial goods and consumer goods. Lately, most of these factors are showing some signs of improvement and inflation rates are likely to come down in the next few quarters.
In the meanwhile, global growth has started falling. Lowering of policy accommodation, the end of pent up demand, rising commodity prices, increase in interest rate and lowering of business, consumer and investor optimism are major factors. The combined impact of high inflation, rapid monetary tightening and slowdown of growth rate are negative for financial markets in short term and markets are already abuzz about recession fears if growth slows significantly without any favourable improvement in inflation. Which has already been seen as major indices corrected by about 15-17% recently.
Since the year 2000, Indian equities have been one of the best performing globally for most time horizons spanning between one to 20 years. Strong economy, better corporate performance, increasing investment in the Indian equity market both from foreign and domestic sources and a large number of companies to choose from in the Indian market are factors which have led to the superior performance of Indian equity. The concern on the Indian equity market, however, remains high valuation multiples, especially relative to the global peers.
Moreover, the combination of improved corporate profit growth and the recent market corrections have reduced valuation multiples for bellwether Indian equity indices. The price to earnings multiple for Nifty 50 or Sensex are currently much lower than the 2016-21 averages and broadly similar to the averages which prevailed during 2011-15. Consequently, even the valuation concerns for the Indian equity markets are largely misplaced if we look at the long term growth runway for the Indian corporate sector.
Also, despite better long term prospects, possibilities of market correction can’t be ruled out in the short term. We live in an interconnected world with the foreign institutional investors being the largest financial investors in the Indian equity market. India cannot remain unscathed if the global equity market continues to correct. Moreover, both during the rally and correction phases, financial markets generally over react. In view of these, it’s reasonable to expect high volatility in the equity market in the foreseeable future as containing inflation continues to remain top priority for global central banks.
(Narendra Solanki – Head- Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers. Views expressed are the author’s own.)