Equity expected to outperform bonds and cash
British multi-national Standard Chartered said 2022 is likely to see markets transitioning from ‘early-cycle to ‘mid-cycle’ with a withdrawal of monetary policy stimulus defining the transition similar to 2003 and 2009 market cycles.
Volatility rises during the period of transition, with equity returns being more modest during this phase, mirroring earnings growth, it added in a report on 22 Dec 2021.
“India’s macro fundamentals remain strong, in our view. Economic growth is expected to remain well above its long-term trend, with the likelihood of further upgrades to consensus GDP growth for the fiscal year ending March 2023, as the recovery broadens.”
“We expect equities to outperform bonds and cash, though we expect returns to be more modest relative to recent years. Earnings growth expectations, the main driver of equity returns in mid-cycle, remains robust with upgrades likely.
Within equities, we prefer large-cap equities over mid-cap and small-cap equities on relatively better macro fundamentals and greater margin of safety in terms of valuation. We expect the value outperformance to continue, and broaden in 2022.
“Within bonds, we maintain our preference for corporate bonds over government bonds with a tilt to high-yield corporate bonds given improving corporate fundamentals and attractive yields premiums. We maintain our preference for short-maturity bonds over medium and long-maturity bonds given the likelihood of higher interest rates,” said the bank.
Though inflation is expected to remain above the RBI’s medium-term target of 4%, it is likely to trend lower amid easing supply disruptions and normalisation of pent-up demand.
The RBI is likely to normalise the policy corridor from the present 65bps spread between reverse repo rate and the repo rate, to a ‘normal’ 25bps by H1 2022 and commence with
interest rate hikes in H2, according to the report.
However, the overall policy environment is likely to remain supportive amid better fiscal dynamics and a lower terminal policy rate compared to previous cycles.
“Though our baseline scenario remains positive for growth and risk assets, we would watch how the following risks evolve over 2022.
“Inflation is the biggest risk to our positive outlook. While, we expect inflation to moderate over the course of 2022 as supply disruptions ease amid normalisation of demand, a persistent rise in inflation could turn macro conditions unfavourable for risk assets.
“We expect bond yields to rise on normalisation of monetary policy, but an over-tightening policy error by central banks could drive volatility significantly higher for risk assets,” said the bank.
COVID-19’s evolution could still see some hiccups as seen with the emergence of the new variant lately, it added.
A possible third wave and vaccine-evading COVID-19 variant remain risks for sustainable economic growth recovery, cautioned the bank. fiinews.com
