Indices tumble on last day, but Dalal Street stands tall in 2022

Globally, the Russia-Ukraine war, the deepening global downturn and China’s struggles with Covid-19 were the big drags in 2022, besides the US Federal Reserve’s policy tightening that led to draining of funds from emerging markets. But resilient domestic investors, who cushioned the shocks of record-high selling by overseas funds, helped the BSE Sensex and NSE Nifty eke out gains in a year that also saw a record-breaking rally by Indian stocks.

Both Sensex and Nifty advanced 5% in 2022, while the dollar-denominated MSCI India index gained close to 2%. In contrast, the MSCI Asia index dropped 19.6%, the MSCI Emerging Markets dropped 22.3% and the MSCI World fell 19.2%. The resilience of the market could be tested if a risk-off sentiment sets in globally in the new year, as India’s valuations are considered rich compared to peers.

Notwithstanding these concerns, market participants expect the Sensex and Nifty to touch new highs in 2023, as per an ET poll of 33 money managers and analysts last week. Most of the participants in the poll predicted the Nifty to cross the 19,000-mark next year, with a third of them expecting it to top 20,000 points.

On Friday, the BSE Sensex fell 293.14 points, or 0.48%, to close at 60,840.74. NSE’s Nifty declined 85.70 points, or 0.47%, to 18,105.30.

The indices hit an all-time high on December 1, but pared the gains as fresh Covid worries resurfaced and the Fed pledging to keep interest rates elevated for a longer period to tame inflation.

Fund Managers for India over China

“The strength of the Indian stock market during 2022 was mainly driven by two factors: strong retail participation and stability in the economy,” chairman Raamdeo Agrawal said. “That helped India maintain its valuation multiples in 2022 despite the instability in the world.”

Domestic mutual funds pumped Rs 1.8 lakh crore into stocks in 2022 (till December 22) driven by steady flows from local investors. This helped counter the selling by foreign portfolio investors, who pulled out more than Rs1.13 lakh crore from the country.

In 2022, central banks in the developed world led by the US Fed raised interest rates at the fastest pace ever, resulting in a dollar strengthening that triggered fund outflows from emerging markets.

Within the region, global fund managers preferred India over China on concerns over the impact of Beijing’s zero-tolerance Covid policy on the economy and uncertainty about its real estate sector.

The outperformance has led to India’s share valuations becoming elevated compared to its peers, a factor that may dim the prospects of local equities in 2023.

The MSCI India is trading close to 25 times the earnings of the index’s component companies. In comparison, the MSCI Emerging Markets index trades about 11 times. India is part of the emerging markets basket.

“While the long-term outlook is solid, markets from near-term lens seem to be fairly priced,” said Mirae Asset in its 2023 outlook note. “In this context, investors looking to add fresh investment could invest in equity-oriented hybrid funds, or allocate via SIPs, or keep aside say 20-30% while making lump sum commitments for any plausible correction.”