Markets In 2022: Making Money From Stocks Will Be Tough, Says Kotak Report

The phase of high returns is reaching an end, according to Kotak Securities and making money is going to be challenging in the coming calendar year.

The markets will undergo some form of correction and consolidation in 2022, the research firm said in its market outlook report. Investors should expect gradual de-rating of equities as bond and equity earnings yields converge.

Accordingly, Kotak advised preference for large caps, while being selective for mid and small caps. "Promising themes and high-growth sectors will outperform in next two or three years," it said, calling buying on dips or accumulation the ideal strategy.

2021 was full of surprises, according to the report. The budget turned out to be positive even as there were few expectations and the Reserve Bank of India focused on spending and capex, rather than just the trade deficit, it said. The impact of a deadlier second Covid wave on the market was "less adverse" than expected.

From April to the first week of December, foreign investors sold Rs 1.2 lakh crore worth of equities while domestic companies bought stocks worth more than Rs 1 lakh crore, the report said.

The benchmark Nifty 50 returned nearly 21% so far this year, after a pullback following the October high. The index continues to trade at "rich" valuations, according to Kotak.

Kotak Securities expect the NSE Nifty 50 and S&P BSE Sensex to hit 19,190 and 63,800, respectively, next fiscal.

"If the markets enter a euphoric mood, our best case estimates are 21,109 and 69,600; and if the economy or earnings fail to improve, our bear case is 17,271 and 59,500."

Kotak sees net profit of the Nifty 50 index to grow 34.5% in FY22 and 16% in FY23. A reading of high-frequency indicators, including GST collection, e-way billing, index of industrial production, freight and consumption, across sectors for recent months have been encouraging—a good sign for the market.

Still, coronavirus mutations and supply-chain issues remain two major risks for domestic and global growth.

Despite expensive market valuations and the potential decrease in the ease of making money, Kotak said earnings growth in many stocks and sectors will provide investment opportunities next fiscal.

"The recent market correction provides investment opportunities in quality large- and mid-cap stocks," it said. The research firm sees banking, financial services and insurance; metals and mining; and oil and gas sectors to do well in the first three months of the new year.

Starting April, however, it expects 95% of incremental growth to primarily come from automobiles and technology, apart from BFSI and oil and gas.

Kotak Securities listed stocks from its coverage universe with right mix of "recovery, visibility and earnings growth".