If the year 2020 was the year of the pandemic and the year 2021 was the year of the recovery, then the year 2022 will likely be the year of risk. Indian markets are likely to be constrained by risk factors on all sides. What do these risks mean? On the one hand, the year 2022 could be more of a micro-game on stocks rather than a macro-game in Indian markets. Experts tell you casually; the easy money is over. The year 2022 will be the year of risks and their evolution.
Risk 1: Omicron remains the big overhang
It has now been just over 2 years since the COVID-19 pandemic hit global growth and tilted the global equations. Unfortunately, even after 2 full years, it’s hard to say for sure that the worst is behind. The last risk factor came in the form of the Omicron variant. The Omicron variant is believed to have its origins in South Africa and has apparently made deep inroads into Europe. This is where the impact is greatest, especially in countries like the UK, Austria, Germany and the Netherlands.
However, Indian markets see this as a risk for a different reason. Unlike COVID-19 and COVID 2.0, the Omicron variant is considered a mutant virus. That means; the billions of vaccines that have been administered to date across the world will have little impact. While it has not yet grown to alarming proportions, scientists fear the Omicron variant may be much more potent and spread faster. The real concern is that it could disrupt travel and trade routes; bring global growth back to box 1.
Risk 2: Jerome Powell becomes ultra-aggressive
In a way, the Fed chairman has already shown unusual aggression over the past two months. In his Dec. 15 policy statement, Powell doubled the monthly taper from $ 15 billion to $ 30 billion, and set a target to complete the reduction by March 2021. The Fed won’t wait too long after the cut to raise rates. Thus, 3 to 4 rate hikes could take place in 2022 itself.
As we saw earlier in 2013 and 2018, Fed rate hikes and tightening are never good for market sentiment. This creates a vicious cycle of a weaker rupee, REIT exits and falling markets, each feeding on each other. Bond yields in India are closer to 6.48% indicating that the markets are strengthening.
Risk 3: risk-free selling by global investors
It is, in a way, linked to Powell’s hawkishness, but for Indian markets it poses a huge risk. Over the past few years, the flows of FPI have been consistently strong, and even the massive sales during the pandemic have recovered in the coming months. However, if US rates are raised, India’s yield spread over developed markets will narrow, which would mean a rush on Indian debt securities.
India’s foreign exchange reserves at 640 billion dollars are much better than in 2013. However, Indian allocations are already well above the weights assigned by the MSCI EM index and this is a risk that looms large. has been manifesting in recent months. As of December 21, India saw steady outflows of REITs as capital flowed to other Asian emerging markets like Taiwan, South Korea and Thailand.
Risk 4: China could grow slower than expected
There are several reasons why China is expected to hit a wall in 2022. First, China is consciously shifting its industrial mix towards green industries. The government has severely weighed on several companies and this has had an impact on growth. Then there are lag issues like Evergrande that could pose large-scale systemic risks to the Chinese economy.
Why is this important? We got a glimpse of the slump in Chinese growth during the COVID era, as it has limited demand for countries that heavily rely on filling their coffers by exporting to China. Many of these countries can be in one location. For India, the problem is different. The People’s Bank of China (PBOC) could have to weaken the yuan to stimulate exports, which would force the rupee to fall. We saw it in 2015 and it could happen again in 2022.
Risk 5: Europe could be the X factor of global risk
There are problems at several levels in Europe. The crisis in southern Europe has been suppressed, not addressed. The great dispute between the North and the South concerns fiscal profligacy. COVID had removed these differences as the ECB was forced to take a liberal stance on liquidity and spending. This will change in 2022.
With elections looming in Italy and France, Eurosceptics are expected to gain influence in key economies in the EU bloc. This means that the decision to separate from the Union could gain momentum among vulnerable economies. Not too far away, the impact of BREXIT should also be felt in the UK’s financial epicenter. Northern Ireland could be the bone of contention, but the bottom line is that Europe is likely to see the unrest return in 2022.
Risk 6: Could we see food riots and expansionist trends in 2022?
It’s been 10 years since we saw the food price turmoil that ultimately led to earthquake changes across the Middle East and Africa. With supply chain constraints and the increase in the number of food commodities destined for alternative fuels, food prices are again creating a problem. Food riots have already been seen in countries like Sudan, Yemen, Lebanon and Egypt. These are normally the most volatile issues. It is difficult to say what form this will take, but it is a major concern.
Expansionary trends are already visible in a number of places. Russia is once again blowing Ukraine’s neck. China has never been too secretive about Taiwan’s integration with mainland China, despite global protests. Chinese action could range from a blockade to outright aggression. Expansionism remains a major risk.
Finally, the news may not be so bad, however. The years 2020 and 2021 ended much better than initially expected. Hopefully the risks of 2022 should be managed effectively.