Sensex navigates geopolitical gyrations to outshine global peers

After liquidity-fuelled bull run, the BSE Sensex faced its moment of reckoning in 2022 as Russia marched into Ukraine, the US Federal Reserve came out all guns blazing in its war against inflation

After a two-year liquidity-fuelled bull run, the BSE Sensex faced its moment of reckoning in 2022 as Russia marched into Ukraine, the US Federal Reserve came out all guns blazing in its war against inflation and a cataclysm engulfed global financial markets.

The aftershocks of the COVID-19 pandemic combined with geopolitical upheavals, a supply shock in the energy markets and synchronised monetary policy tightening by central banks across the world meant the global economy was engulfed in a constant tangle of 'polycrisis'.

But, the unwavering faith of domestic investors kept Dalal Street relatively unscathed and the Indian benchmarks shrugged off the gloomy cues with aplomb.

After a lacklustre spell for most of the year, Sensex started picking up momentum as the festive season approached. It closed at its all-time high of 63,284.19 on December 1.

However, hopes of a year-end Santa Claus rally were dashed as spiralling COVID cases in China sparked renewed fears of a global pandemic wave, sending bulls scurrying for cover.

The Sensex is up just 1.12 per cent year-to-date (till December 25), but is still the world's best-performing large market index.

In fact, none of the major global indices have managed to muster gains in this brutal year, including the Dow Jones (down 9.24 per cent in 2022 so far), FTSE 100 (dipped 0.43 per cent), Nikkei (shed 10.47 per cent), Hang Seng (lost 15.82 per cent) and the Shanghai Composite Index (dropped 16.15 per cent).

The credit for this relative outperformance goes largely to the domestic retail and institutional investors, who kept the faith despite the steady drumbeat of negative headlines and absorbed the record selloff by foreign funds.

Compare this to the panic of the global financial crisis of 2008, when the Sensex had collapsed by over 50 per cent as FIIs pressed the exit button. Foreign Institutional Investors (FIIs) have pulled out a record Rs 1.21 lakh crore from Indian equities in 2022 so far, in lockstep with rate hikes by the US Fed which have triggered an exodus from emerging markets, including India.

In contrast, domestic investors displayed the sharp instincts of market veterans and 'bought the dip' with a vengeance.

The share of retail investors' shareholding in NSE-listed firms reached an all-time high of 7.42 per cent (around Rs 19 lakh crore) as on March 31, 2022.

Mutual fund investments through the systematic investment plans or the SIP route too have been on a rising trend despite market fluctuations, touching a record high of Rs 13,306 crore in November (both equity and debt segments).

This pushed the Assets Under Management (AUM) of the 43-player MF industry to a lifetime peak of Rs 40.49 lakh crore at the end of November.

India's robust fundamentals and strong corporate performance at a time when the global economy teetered on the brink of a recession were another tailwind for equities.

"GST collection stood above Rs 1.4 lakh crore for the eighth consecutive month in November, while e-way bill generation has remained above the 7 crore number since March 2022. Other economic indicators like GDP and PMI too recovered well post-pandemic," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services.

"The driving force behind India's outperformance was the strong corporate earnings growth of 24 per cent CAGR over FY20-22 as well as pick up in capex by the central government, which revived the Indian economy from the COVID-led slump," he added.

While many investors capitalised on these feel-good factors, there were quite a few who received nothing but invaluable lessons.

One such lesson was that narrative is no substitute for cashflows, as evidenced by a host of new-age technology companies which emerged as the top wealth destroyers of 2022.

After high-octane IPOs of Paytm and Zomato last year, which were heralded as the coming of age of Indian startups, companies like Delhivery and Tracxn made their market debuts in 2022. All of them are trading anywhere between 15 to 70 per cent below their listing price, wiping off thousands of crores of investor wealth.

Paytm, in fact, earned the dubious distinction of being the world's worst-performing large IPO in a decade.

Businesses that appeared 'disruptive' or 'innovative' when credit was cheap and plentiful, suddenly morphed into cash-guzzling liabilities as interest rates soared.

The Big Tech meltdown in the US, where Alphabet, Amazon, Meta and other tech titans lost a staggering USD 5.6 trillion of market capitalisation, reverberated through the global markets, puncturing both valuations and investor egos.

Back home, even established marquee names have struggled to justify lofty valuations in the face of a challenging business environment.

Market heavyweights HDFC and HDFC Bank had soared 10 per cent on April 4 after announcing the biggest merger in India's corporate history, but the rally quickly fizzled out after the initial euphoria faded.

The same was the case with LIC, which listed in May this year after the country's biggest IPO of Rs 20,557 crore, but has been a chronic under-performer and has not managed to reach its issue price yet.

The darkening of the macroeconomic outlook worldwide can be traced back to the bellwether of global financial market sentiment -- the US Federal Reserve.

The US central bank has raised rates by seven times this year, taking it from zero at the beginning of 2022 to 4.25 - 4.50 per cent currently. Fed chair Jerome Powell has reiterated that its fight against decades-high inflation is not over yet, sending shivers down the spine of participants who were wagering on rates nearing their peak this year itself.

The RBI too has been on a policy tightening spree, jacking up the repo rate by a cumulative 225 basis points in five tranches since May to bring it to 6.25 per cent in an effort to cool down price rise. While India's retail inflation dipped below the RBI's upper tolerance limit of 6 per cent for the first time this year in November, there is still a long way to go.

"The cautious monetary policy is expected to continue in H1CY23, and for India, the broad valuation persists at premium levels, which is the hindrance in the short to medium term.

India's valuation will reduce to a long-term average due to shuffling by foreign investors and a slowdown in domestic earnings growth.

"We can expect a modest positive average return in 2023 depending on the performance of developed and other emerging markets. India, being an essential part of the emerging markets, will benefit, though we can underperform on a comparative basis," said Vinod Nair, Head of Research at Geojit Financial Services.

For investors whip-lashed by one global turmoil after another, these may well be much-needed words of comfort.