Indian stocks set to post their worst half-year performance in two years

Indian equity markets are set to post their worst half-yearly performance in the past two years as the market sentiment soured in H1-CY22 on account of an elongated geopolitical conflict between Russia and Ukraine and the consequent rise in key commodity prices. That apart, central banks’ action to tame galloping inflation by raising key rates also punctured the equity market rally.

While the frontline indices - the S&P BSE Sensex and the Nifty 50 - have shed 9 per cent each in the first half of calendar year 2022 (H1-CY22), the fall in mid-and small-cap indices has been sharper with both these indexes slipping 12 per cent and 15 per cent, respectively on the BSE during this period. 

Among sectors, the largest decline was seen in metal & information technology (IT) stocks, while relative outperformance was seen in auto counters. 

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Earlier in H1CY20, the frontline indices had lost 15 per cent each, while the mid-and small-cap indexes plunged 13 per cent and 10 per cent, respectively after growing instability due to the Covidd-19 pandemic.

The second half of CY22 (H2-CY22) too, analysts believe, will be marred by volatility but expect the markets to bottom out if the global central banks, especially the US Federal Reserve (US Fed), hints at a pause in its rate hiking cycle.

“H2-CY22 will remain challenging for the global financial markets. There is a strong possibility of a recession in major economies, which can trigger a further fall in equity markets. That said, they’re likely to bottom out in H2-CY22. Indian markets, on the other hand, are likely to remain resilient relative to their global peers. One needs to watch out for how the foreign investor flows play out,” said Deepak Jasani, head of retail research at HDFC Securities.

On their part, foreign portfolio investors (FIIs) have remained net sellers for nine straight months. In H1-CY22, they have offloaded Rs 2.15 trillion from the equities and around Rs 2.51 trillion since October 2021 when the markets were at their peak levels, National Securities Depository (NSDL) data showed.

“Amid high inflation and aggressive tightening by the central banks, the downside risks to earnings growth are emerging. While we do not expect major earnings cut for Indian equities, some moderation in earnings growth cannot be ruled out, especially if global headwinds worsen further. Against this backdrop, we believe that volatility in equities may continue as multiple headwinds impact investor sentiments,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management in a recent co-authored note with Premal Kamdar.

Despite multiple headwinds, analysts suggest investors start nibbling into beaten down stocks and sectors selectively. The present volatility, they said, offers an attractive opportunity to build a long-term portfolio of quality companies, which have lean balance sheets, are capital efficient and have growth longevity.

“The risk of a hurricane—a potential Fed policy error and the risks emanating from war in Ukraine, and lockdowns in China — seems well understood by investors. This also probably means that the downside scenarios are at least partially reflected in current prices. It leaves a smaller chance that one of these risks takes markets by surprise and causes more material weakness. Long-term investors will be rewarded for enduring the volatility that will likely define markets over the remainder of the year,” wrote analysts at JP Morgan Wealth Management in a recent note.