After ending the calendar year 2021 with a gain of 22 per cent on the Sensex and 24 per cent on the Nifty, red flags are now up on the Street with analysts suggesting investors tread carefully as the markets face multiple headwinds – both from domestic and global factors – which can keep them choppy in the year ahead. What could cap the market upside at least in the short-term is the fast-spreading Covid variant – Omicron – that has already seen several states adopt a precautionary approach. That said, analysts at Morgan Stanley, for instance, expect the emerging markets, including India, to muddle through most part of 2022 amid rich valuations.
Despite downgrading India, the global research and brokerage house remains ‘structurally bullish’ on Indian equities and is looking for stock-level opportunities to hold exposure. Jonathan F Garner, chief Asia and emerging market strategist at Morgan Stanley says, EM equities will continue to struggle next year, with only 3 per cent upside to their December 2022 target. According to Credit Suisse, earnings will be the key driver for equity returns. Sectors that lagged the global recovery from the pandemic shock to emerge as bright spots alongside industries that benefit from secular growth trends. Other analysts, too, echo the same view and suggest stock selection will be key for investors to beat index returns. So which sectors are likely to do well in 2022?A similar sentiment is echoed by those at ICICI Securities, who expect the IT sector to lead the rally, supported by cyclicals like capital goods and BFSI. Herald van der Linde, head of equity strategy for Asia Pacific at HSBC, however, suggests staying away from real estate, auto components and sectors that have regulatory uncertainty like PSU banks and utilities. Over the medium-term, however, the market direction will be guided by a slew of domestic factors such as the upcoming result season for the quarter ended December 2021, expectations from the Union Budget that is likely to be presented on February 1.