Outlook 2022: Here’s JP Morgan’s view on Nifty levels, key risks and main themes

US investment bank JP Morgan has advised clients to shift their India portfolio allocation towards high-beta and rate-sensitive stocks such as financials, automobiles, real estate, and export-oriented companies for 2022.

In an outlook report for 2022, JP Morgan’s head of India research and Indian equity strategist Sanjay Mookim highlighted his cautious approach for Indian equities. He said the markets may maintain their strong momentum in the short term, but may succumb to the long-term risks of higher crude oil prices, weaker consumption-to-GDP ratio, inflation risks, peak valuations and interest rate hikes.

Mookim terms the rally in Indian equities as ‘Icarus Trade’ after the Greek god Icarus, who escaped imprisonment by using artificial wax wings but fell into the Aegean sea and drowned after the wings melted when he flew too close to the sun.

JP Morgan drew parallels between the wax wings and excess liquidity in Indian equities that took markets to record highs and shot up valuations to multi-year highs. Here’s what JP Morgan told its clients.

Markets at the top

Indian equities look set for a short-term bounce if concerns regarding the Omicron variant of the coronavirus fade and global equities do well on strong growth supplemented by a potential revival in China.

However, the premium commanded by the MCSI India Index to emerging markets is close to a 15-year high and higher crude oil prices have almost hurt India’s relative performance.

JP Morgan’s best-case scenario indicates a Nifty target of 19,000 for December 2022, which offers a 10% upside from the current levels.

The Nifty currently trades around 16,900-17,000 levels. The gauge of top 50 companies by market value has surged nearly 25% since the beginning of 2021.

Weaker consumption-to-GDP

As with most countries, Indian fiscal and monetary impulses are likely to slow in 2022. JP Morgan believes economic momentum will be driven by the continued impact of 2020-21 policies, incremental reopening, and organic upside.

“Unlike in DM (developed markets), the first has not been very strong in India (the fiscal impulse was largely an 2HFY21 effect). Purchasing power seems concentrated at the top; the broader mass of consumers have lower incomes and savings through COVID-19, while consumer confidence measures remain very low,” said Mookim.

JP Morgan built a sequential growth of 5.5% quarter-on-quarter seasonally adjusted annual rate (average) for FY23, which would result in headline GDP growth of 8.8% due to favourable base effects.

However, the pace of the recovery after the second Covid-19 wave has been slower. While infections peaked in May 2021, GDP remains well below the pre-pandemic trend even in the September quarter and the gap to trend remains very high for private final consumption, worryingly, the US bank said.

Inflation risks

Elevated inflation (and rising inflation expectations) remains a key risk. The Reserve Bank of India is likely to remain pro-growth as long as it can (focused on the large output gap), but this can create eventual currency risks.

Increasing US rates in addition can complicate India’s monetary policy in 2022. While JP Morgan has a neutral stance on Indian IT on risks to margins, they could become a preferred hiding spot if structural concerns emerge for the Indian rupee vis-a-vis the US dollar.

Styles and themes to bat for

Elevated expectations and slower outcomes increase the likelihood of earnings misses. Market breadth should narrow (as it did in 2018 after a strong 2017), JP Morgan said.

Its preferred themes of investment are financials (with ICICI Bank, HDFC Bank and SBI as its preferred stocks), automobiles (TVS Motor, Bajaj Auto, and Mahindra & Mahindra), consumption and businesses focused on the higher end of the pyramid (Titan and United Breweries).

JP Morgan also prefers to bet on companies that may benefit from reopening of Covid-19 restrictions as well as companies that have direct correlation with global demand.