the Rise in Covid-19 cases led by Omicron the world has poured cold water on hopes of a rapid economic recovery and dampened investor morale. The doors to workplaces and businesses that had opened in anticipation of a return to normal are closed again as partial closures of varying intensity begin to be reimposed.
How the pandemic plays out in its third year will determine the pace and nature of the recovery. Investments in all asset classes will depend on factors such as inflation, interest rate fluctuations, credit growth, foreign portfolio investments and the price of crude oil. Job creation and the certainty of stable incomes for those at the bottom of the pyramid who have been affected by the economic disruptions of the first and second waves will be the key to long-term sustainable growth for India. .
Omicron concern
There is cautious optimism that the new variant, which is highly transmissible but not necessarily so deadly, will not trigger a wave of serious illness that will overwhelm hospitals and fill cremation sites like Delta did in April-May. Some experts have argued that the emergence of Omicron actually signaled the “beginning of the end” of the pandemic, and the virus could enter the endemic phase.
It is hoped that the closures will remain relatively soft and that there will be limited disruption to economic activity; However, there are also fears that the exponentially increasing number of cases could hurt consumption and the recovery in corporate profits.
“Now that Covid is a known unknown, it may not affect economic activity,” said CJ George, MD, Geojit Financial Services. “The biggest concern is how inflation and interest rates will move in 2022, and the impact they will have on the debt and equity markets.”
Interest rate
Stimulus packages announced by governments to support national economies in 2020 and 2021 have led to the problem of inflation. While inflation in India is still in a comfortable zone, it has peaked in four decades in the United States. The Federal Reserve has decided to step up the pace of reduction in monthly asset purchases; it’s also likely to hike rates twice, possibly three times, in 2022.
Market participants say the pace of the withdrawal of stimulus measures and rising interest rates could disrupt equity and debt markets going forward. As the Fed began to decline, foreign portfolio investment (REIT) pulled back – they pulled over Rs 40,000 crore from Indian stocks since November 22, putting pressure on benchmarks.
However, National Institutional Investors (DII) bought – and invested a net amount of over Rs 48,900 crore during the same period.
If equity markets are affected by equity capital outflows, a rise in interest rates in India may reduce the rate of deployment of money by retail investors into domestic equities and lead to a reallocation from equities to debt. .
Outlook for actions
Some market experts believe that while interest rates could rise in 2022, inflation will not be of great concern in India. Equities are expected to do well if Omicron does not cause a major disruption, and domestic retail flows to equities remain stronger than REIT outflows.
“Investors will need to moderate their expectations for stock returns in 2022. It’s a fair value market. If Omicron doesn’t cause big disruption, if domestic retail inflows remain stronger than REIT outflows and corporate earnings remain strong, then it will outperform other asset classes, ”said Nilesh Shah, MD, Kotak Mahindra AMC.
George of Geojit pointed out that while interest rate hikes in developed markets will put some pressure on domestic stocks, as REITs will withdraw money, even domestic rate hikes will cause the flow of money to fall. towards the actions of retail investors.
Debt market
Yields on government securities have started to tighten, falling from the recent low of 6.1% on September 22 to 6.4% on Thursday. As the RBI has moved away from central banks in developed countries and argued for the need to maintain an accommodative stance, the market is pushing interest rates up in anticipation of the rising cost of capital. The largest state lender, the State Bank of India, raised the base rate by 10 basis points to 7.55% per annum at the start of the month, indicating that the era of low interest rates may be upon us. be gone.
Movements in returns, which depend on changes in interest rates, can result in capital gains or losses for investors. If an individual holds a bond with a yield of 6%, a rise in bond yields in the market will lower the price of the bond. On the other hand, a fall in the bond yield below 6% will benefit the investor because the price of the bond will increase, generating capital gains. Investors in term deposits may choose to maintain a lower duration in order to take advantage of higher rates in the future.
Rising yields also have implications for home loans. Floating rates can increase as banks try to pass any increased costs on to customers.
Gold corrected from its peak of around $ 2,120 an ounce in August 2020 to around $ 1,800. Gold is expected to remain positive going forward and gain ground in case it closes above $ 1,850 due to expectations of rising interest rates and inflation.
Geopolitical potential
As the confrontation between China and the West intensifies, India could be a beneficiary of foreign direct investment from the United States and Europe, market experts say.
International manufacturing companies have started to look to India as they seek to diversify their production outside of China, and several private investors and venture capital funds have increased their investments in India.
However, India will need to work hard on the policy, skills development and regulatory requirements in order to attract these investments.
Former chief economic adviser Arvind Subramanian wrote in a recent article in Foreign Affairs magazine that “India has recently made impressive strides in building the ‘hardware’ for economic success … the country continues to struggle to fix its “Software”, the crucial economic framework under which national entrepreneurs and foreign companies must operate “.
“Policies are changed abruptly; the rules are changed to favor certain businesses. As a result, domestic entrepreneurs and foreign companies have been reluctant to undertake the investments necessary to exploit India’s rapidly evolving hardware, ”Subramanian wrote.
