Which sectors moved equity markets in January 2022?

1 Feb 2022 , 12:54 PM

The movement of the Nifty and the Sensex were extremely tepid for the month of January 2022. For example, if you look at the market cap comparisons; Nifty closed (-0.10%) lower, Nifty Mid-Cap closed (-0.20%) lower while Nifty Small Cap closed (-1.53%) lower for Jan-22.

The real picture is evident only if you look at the second half of January when the Nifty and the Mid cap indices were down sharply. There was selling visible across the board with the IT index taking it on the chin. Considering its substantial weightage in the index, weakness in the
IT index obviously led to a market correction.

The highlight of the month of Jan-22, or you can call it the low-point, was the aggressive selling by the foreign portfolio investors (FPIs). In Jan-22, FPIs sold Rs33,304cr of equities or approximately $4.46 billion. Unlike the previous months, there was not much of FPI support to IPOs.  Here is the stock market story of Jan-22

Look back at Jan-22 and looking ahead at Feb-22

If Year 2021 was a good year for equities as an asset class, year 2022 began on a rough note. The month started off with some enthusiasm in the market but just failed to sustain higher levels after the Fed hinted at aggressive rate hikes. Here is what drove markets in Jan-22 and could still impact in Feb-22 also.

a) The big question mark is over the Union Budget and the Monetary Policy in Feb-22. What the markets will prefer is a reformist budget and dovish monetary policy. What the markets would dread is a populist budget and a hawkish monetary policy.

b) Fed tapering and rate hikes was the big risk for the stock markets in January with Goldman Sachs pencilling in 5 possible rate hikes. Hawkishness is set to continue.

c) Q3 results have been decent on top line but the real problem is in the operating profit growth and the operating margins. They disappointed across most of the key sectors.

d) Despite the correction, valuation remains a concern as FPIs find other Asian markets relatively cheaper and there is also the spectre of risk-off flows deepening in Feb-22.

e) Oil continues to be the big question mark with Brent scaling above $90/bbl. The implications for input costs, inflation and current account deficit in India is huge.

f) FPI flows have been the big issue with Rs33,304cr worth of equities sold in Jan-22, making it the worst month since Mar-20. With 5 rate hikes likely by the Fed in 2022, risk-off flows emerge as the big risk factor in 2022.

g) Finally, the good news is that Omicron risk appears to have evaporated and the incremental damage to growth has been just about minimal.

Negative returns on defensives; positive returns on rate sensitives
Out of the 10 sectors evaluated for Jan-22, four sectors gave positive returns, which is encouraging. With the Nifty almost flat for the month of Jan-22, the rate sensitives and oil sector gave positive returns while the defensives gave negative returns.

The big star of Jan-22 was PSU Banking, which was up 17.86% for Jan-22. Here the positive returns was on account of reduced NPAs, lower provisioning, roadmap for privatization of PSU banks and positive developments on the bad bank front.

Among other sectors that gave positive returns, autos did extremely well as most auto companies raised prices in Jan-22 in response to higher input costs. Oil & Gas stocks gained, which is not surprising considering that Brent crude is above $90/bbl and gas prices are rising rapidly globally. The fourth sector to gain was the private banks, where there are expectation of a sharp revival after almost one full year of underperformance. Ironically, rate sensitives did well, despite the obviously hawkish signals.

Data Source: NSE

Defensive sectors were the laggards in January 2022

The biggest laggard was the IT sector which lost over 10% in the month of Jan-22 alone. This was largely an outcome of operating margin pressures seen in IT stocks in the light of rising manpower costs and higher attrition levels. However, there has been a sell-off in technology stocks globally and Indian IT has just latched on to the global trend. That was perhaps the real reasons, because IT stocks lost value across the board.

Pharma was another laggard in Jan-22 with -7.33% returns. US business has been tough amidst rising competition, the dividends of COVID have been waning while the supply chain constraints and the higher input costs continue to dent operating margins of. Consumer durables also underperformed in Jan-22 with -5.63% returns as weak consumer demand was the real concern for this sector.

Among the other sectors that lagged the Nifty were FMCG and metals. In the case of FMCG, it was a combination of weak rural markets and a sharp fall in operating profits due to cost escalation of inputs. Companies have only been able to pass on part of the spike. Metals have been under pressure with construction and auto output under strain.

The month of Jan-22 saw a sharp worsening of sentiments in the second half. A lot will now predicate on the Union Budget 2022. That could be the next big trigger for markets.