Markets sign off record-breaking year on a high note; Sensex rises 459 pts

But returns from equities may moderate, warn experts

The Indian benchmark indices ended the last trading session of 2021 on a high note, even as global cues remained mixed amid concerns around Omicron. The Sensex ended the session at 58,254, following a gain of 459 points or 0.8 per cent. The Nifty50, on the other hand, ended the session at 17,354, up 150 points or 0.8 per cent. 

In CY21, the Sensex gained 22 per cent, the best since 2017, and outperformed many of its global peers. The two indices gained every week of December, barring one.

The recovery from the pandemic and massive liquidity, thanks to monetary easing by central banks in the developed world, helped the indices post double-digit returns. However, after the indices hit record highs in October, valuation concerns made foreign portfolio investors (FPIs) net sellers for the last three months.

Apart from valuations, interest rates were a concern for FPIs as central banks prioritised fighting inflation over growth towards the end of the year. Central banks had termed inflation transitory before the sharp U-turn, which took many by surprise.

Gains in 2021 were on the back of low-interest rates and the emergence of new investors, apart from liquidity support from central banks. Low returns from other asset classes and a bit of extra free time due to lockdowns made many new investors try their hand in equities.

The emergence of the highly contagious Omicron variant was another reason for the volatility. However, investors are taking comfort in multiple studies, which have claimed that the latest variant is less lethal than the previous ones. And vaccines could be more effective in dealing with Omicron. 

However, experts have warned the high transmissibility of the strain could put immense pressure on health workers and systems. This week, the World Health Organisation warned of a tsunami of Covid cases as some countries reported record-breaking infection numbers.

Going forward, analysts said, returns from the equity markets could moderate next year as central banks would start raising rates.

“Any case, the markets may not give much of a return. It may not collapse if Omicron is contained but it will not go anywhere. It may gain 3-4 per cent from the current levels. Inflation is rising and interest will get hiked. The situation is not very different in India. The RBI will have to follow the same path. While the positives have been factored in, the negatives will persist,” said U R Bhat, co-founder, Alphaniti Fintech.

Dhiraj Relli, managing director and CEO, HDFC Securities, said central banks and their assessment of economic conditions will be shaping investment strategies in 2022. “The markets can be more discerning in 2022 and hence sticking to high-quality companies and maintaining your planned asset allocation remains key for a better outcome from 2022."

 Analysts, however, said the Indian equities can still spring a surprise next year as the economy is in recovery mode, characterised by solid GDP growth, tax collections, earning recovery, and the possible start of the Capex cycle from corporates.

The market breadth was strong on Friday, with 2,413 stocks advancing and 975 declining on the BSE. Around 679 stocks were locked on the upper circuit on the BSE, and 430 had hit their 52-week highs. All the sectoral indices were gained on the BSE on Friday. Metal stocks gained the most, and its gauge rose 2.1 per cent.