Events that could drive the equity markets in the short term

Equity market began 2022 on an optimistic note with benchmark S&P BSE Sensex trading above 61,000-mark for the first time. Return of the foreign investors, hopes of better-than-expected domestic corporate earnings and positive macroeconomic cues like upbeat exports and GST collection data kept the mood upbeat.

Events that could drive the equity markets in the short term

Equity market began 2022 on an optimistic note with benchmark S&P BSE Sensex trading above 61,000-mark for the first time. Return of the foreign investors, hopes of better-than-expected domestic corporate earnings and positive macroeconomic cues like upbeat exports and GST collection data kept the mood upbeat. But will the rally sustain going ahead or not is something we need to wait and watch since there are host of events that could drive the performance of the equity markets in the short term. A quick note and cautious approach to these events can help investors to plan out their investment strategy.

Corporate earnings

Equity market is likely to look at the corporate earnings-related developments. Stocks related to auto, information technology and sugar sectors have seen strong momentum recently. Hopes of the better-than-expected earnings is likely to act as a booster and companies reporting mixed bag of earnings may witness some selling pressure as seen in the shares of Avenue Supermart recently. Earnings related news is likely to trigger some action and reaction from the market participants in the coming weeks.

Likelihood of the interest rate hike by the US Federal Reserve

The market across the globe including India is awaiting the most crucial event by the end of this month - US Federal Reserve policy meeting on 25th and 26th January, 2022. The meeting is likely to throw light on Fed’s timetable for the interest rate hike in 2022 given the progress in the US Labour market and higher US inflation. US consumer inflation surged to 40 years high to 7% on year in December 2021.  The impact of US Fed hike and the tapering on the Indian market was discussed in detail in one of our previous articles - Possibility of US Fed tapering and its impact on Indian markets

Union Budget

One of the most important economic events of the year is the Union Budget which will be unveiled on February 1, 2022. In the past two years, government announced several reforms to stimulate the domestic economy reeling under the pandemic pressure. As the economy is still in the fragile state, the industry experts expect budget to focus on high growth, higher infra focussed capex, strengthening public health infrastructure, maintain fiscal prudence rather than fiscal profligacy, more incentives to Indian start-ups and MSMEs and tax relief to the individual tax payers. Currently, market is optimistic about the budget and trading at record highs but investors need to invest wisely as unexpected announcements can bring in sharp volatility during and after budget.  Avoid taking too much exposure based on speculation, rumours or tips in stocks and trade in line with the risk bearing capacity.

RBI monetary policy

Soon after the Union Budget, the Reserve Bank of India (RBI) will announce its Monetary policy outcome on February 9, 2022.  While RBI has maintained its status quo on the interest rates for the ninth consecutive time in its December 2021 policy, the market will look out for some signs on policy stance amid the rising inflationary pressure in the economy.  India’s retail inflation measured by the consumer Price Index (CPI) rose to 5-month high of 5.59% on year in December 2021.  

But given the rising risks to fragile economic growth such as private consumption remaining well below their pre-pandemic levels back home, rainfall in November 2021 pushing vegetable prices higher, global trade impacted by the supply chain and logistics disruptions due to covid-19, weaker demand and emergence of the Omicron variant, a continued policy support is warranted for a durable, broad-based economic recovery.  Let’s wait for the central bank to unveil the details on the policy stance and also all the other liquidity measures the central bank launched in the past to support the economy during the pandemic.

Coronavirus and new variants

Just when the economy was trying get back to normalcy towards the end of 2021, coronavirus threat started looming once again. Cases spiked across the globe including India too. Adding to the worries were new virus variants – Omicron, DeltaCron. While currently market has shown the resilience to the increase in the cases as the risk of hospitalisation and mortality rate, so far, has been low compared to the previous waves.  But covid related developments will continue to influence the market.  In addition, any major actions taken by the states which have currently imposed restrictions and not complete lockdown is likely to watch out for.

Foreign flows

The mood of the foreign institutional investors (FIIs) amid the US Fed policy meeting and upcoming Union Budget will be closely watched by the market. According to NSDL data, foreign investors were net sellers of the Indian equities for the last three months of the 2021 due to year end portfolio rebalancing, rising inflation, stretched valuations and US Fed hawkish comments. The domestic indices were highly volatile intermittently owing to massive selling by the foreign investors. Going ahead, the outcome of these events will influence foreign flows and in turn govern the market trend.

In addition, elections in all five states including Uttar Pradesh, Goa, Manipur, Punjab, and Uttarakhand will also be one of the key political events which will closely watched by the investors.  

Summing up

All the upcoming events is likely to trigger some reaction from the market. Positive or negative we can’t predict but investors need to be vigilant, be prudent and hold a well-diversified portfolio.