2022 will go down in history as a year of unprecedented turmoil for investors. The war in Ukraine and the battle of central banks to combat inflation made 2022 a challenging year for equity markets. In a year marked by rising inflation and slowing GDP growth, Indian markets offered comfort to investors.
Global markets performance
Inflation was the dominant theme that weighed down the market in the year 2022.
2022 was a year to forget for investors globally. One of the major indices in the US, the S&P 500 index, tanked 19.4%, making 2022 the worst year for S&P 500 since 2008. While the US tech-dominated index NASDAQ 100 was hit the most, plunging 33.0% in 2022, much of their downfall is attributed to rising rates & dimming economic outlook.
Developed markets were no different and saw significant declines. Germany plunged the most among the developed markets by a whopping 24.5%. Interestingly the UK market, which made headlines, fell the least, dropping 8.5%, despite a weak economy and shifting political leadership. In the year’s first half, the UK market fell 10.8% on the back of energy crisis concerns, tax cut announcement and change in leadership, but soon bounced back after the government rolled back its tax cut plans.
The emerging market saw one of the steepest bear cycles. The decline exceeded the average decline of the previous ten bear markets, with China & Taiwan dropping the most, 23.6% & 32.2%, respectively. China played a significant role in the decline in emerging assets this year, accounting for almost a third of the market capitalization of many emerging market indices. Much of the decline can be attributed to widespread lockdowns to contain the spread of new variants of COVID. In contrast, Brazil rose 1.7% and was crowned one of the best-performing major equity markets. This year in the emerging markets pack. Brazil’s outperformance is largely due to a bounce back by Vale SA (the largest stock accounting for 20% weight in the index), which benefitted from rising base metal prices.
India, alongside Brazil, was a bright spot in an otherwise gloom and doom market, noting gains of 4.3% in INR terms. (Returns in USD -6.3%)
Domestic markets performance
The chatter that Indian markets were decoupled from the world. It was evident in the markets as Nifty 50 considerably outperformed its peers and registered the biggest gains among the major global indices.
During the first six months, Nifty50 lost 9.1% but then began to show significant signs of recovery, rising 14.7% in the other half of the year. The year was a tale of two halves, as in the first half, large caps did well, falling lesser than the mid and small caps. While in the second half, the latter led the recovery.
Exhibit 1: Broad-based indices performance in 2022
Source: Niftyindices. Data as of 30-Dec-2022; Large cap is a proxy for Nifty50. Midcap is a proxy for Nifty midcap150 & smallcap is a proxy for Nifty smallcap250. Multicap is a proxy for Nifty500
What led to the outperformance of domestic indices?
Over the past two decades, FII typically influenced market sentiment in India. But recently, there has been a significant shift, with domestic investors doing the bulk of the work to keep the index afloat even while FII withdrew from the Indian market in droves.
On the sectoral front, the banking and metal sector were the top performers in 2022. Strong credit growth backed by clean balance sheets has created a strong case for Indian banks after being out of favour for the last few years. At the same time, metal stocks did well due to rising base metal prices. Autos and FMCG followed closely, gaining close to 16%. Pent-up demand and easing supply chain issues helped the auto sector, while the FMCG sector benefited from softening commodity prices. While IT, which used to be the favourite for investors, faced a beating plunging 26.0% this year. With talks of global recession gathering momentum, IT companies have been issuing pink slips after going on a hiring spree during the lockdown as cost-cutting measures. Consumer durables, the second biggest loser this year, struggled due to a rise in input prices and interest rate hikes pushing EMIs higher for customers. The real estate industry, too, lost its lustre due to investor apprehension of an impending recession.
Exhibit 2: Top 3 performers & detractors
Source: Niftyindices. Data as of 30-Dec-2022
Value making a remarkable comeback
Value factor extended its winning streak in 2022 by gaining ~27% and outperforming other factors by a wide margin. Historically, the Value factor has tended to do well during periods of high inflation and rising interest rates, as it typically has inflation-sensitive sectors such as commodities, energy & financial services that have performed well during the year.
The momentum factor dropped by 5.4%, making it the worst-performing factor. A contrasting year as compared to the 2021 year, where it delivered ~54%.
In line with expectation, quality and low volatility factors were relatively stable, with the quality factor gaining 13.0%, followed by low volatility gaining 4.5%.
As we reflect on how this year played out in various parts of the world, we noticed a significant sector rotation. Banking, which had been falling since 2018, gained traction this year, while IT, the market’s favourite in 2021, underperformed dramatically. The US market was the most popular for investments globally and saw severe losses in 2022. Brazil, an often-overlooked market, outperformed the emerging markets group by a wide margin. On factors, Value has been a laggard for the last few years and made a remarkable comeback outperforming other factors significantly.
The year 2022 highlights the significance of asset allocation in the portfolio and clarifies that market timing is fool’s gold.
Way forward
- India is expected to continue doing well despite global headwinds, inflation and geopolitical tensions.
- Central banks across developed markets may continue hiking interest rates, albeit in smaller quantum. But markets expect the rate to be sustained at a higher level for an extended period causing some economies to undergo (mild?) recession.
Happy New Year #2023
Author Name – Hitesh Raheja
Co-Author Name – Anuj Desai
Disclaimer: The article has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information / data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this article are as on date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The Sectors mentioned above are used to explain the concept and is for illustration purpose only and should not be used for development or implementation of any investment strategy. It should not be construed as investment advice to any party. The sectors may or may not be part of our schemes. Past performance may or may not be sustained in future. The sector mentioned herein are for general assessment purpose only and not a complete disclosure of every material fact.The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article. Mutual Fund investments are subject to market risks, read all scheme related documents carefully
