Domestic equities witnessed strong rebound for the second consecutive day and shrugged off tepid global cues. Notably, upbeat economic data for November and steady GDP growth in 2QFY22 lifted investors' sentiments. Baring realty, all key sectoral indices traded in positive territories today with Nifty IT, Financial Services and Metal witnessing over 1% gains. However, midcap and smallcap indices remined underperformers, while volatility index softened further by over 5% today. Notably, housing finance companies were in focus today as risk reward in many HFCs became favourable after recent correction. Adani Ports, HDFC, Powergrid and Sun Pharma were among top Nifty gainers, while Axis Bank, ICICI Bank, Cipla and Ultratech Cement were laggards.
Notably, concerns with regards to spread of Omicron and effectiveness of existing vaccines against it have weighed on investors' sentiments in last couple of days. However, any positive development with regards to Omicron can generate huge buying interests at these levels. Further, Powell's recent comment about faster tapering of bond buying programme in the backdrop of sustained elevated inflation may weigh on sentiments. On the positive side high frequency key economic indicators remained upbeat in recent months and continues to reflect sustained economic activities and sustainable earnings growth. Further, government's effort to calm down high commodity prices by cutting excise duties in petrol and diesel augurs well, which along with CPI remaining below RBI's reference range will also aid RBI to keep interest rate at current range to support ongoing recovery. Notably, domestic markets witnessed high volatility in recent weeks due to rise in dollar index and absence of positive surprise from 2QFY22 earnings especially due to higher input costs. Notably, high input costs have adversely impacted margins and profitability of consumer and manufacturing companies despite steady volume and sales growth. However, despite that Nifty recorded 11% YoY and 30% YoY growth in revenue and profit, respectively during 2QFY22. In our view, earnings recovery should also get support from better-than-expected government's fiscal deficit in Apr-Oct'21, which stood just 36% of budgetary estimate. Further, Moody's upgraded rating for banking industry from negative to stable in the backdrop of likely pick up in credit growth (10-13% annually) and possible contraction in credit cost, which should offer more comfort to investors. Steady rise in disbursal of banks and NBFCs in 2QFY22 and sharp rise in Securitization volumes in 1HFY22 vindicate growth momentum of the economy. Tax collection data for 1HFY21 was also quite impressive, which virtually crossed pre-pandemic FY20 numbers with a wide margin. In our view, India is at the beginning of capex revival phase and therefore corporate earnings recovery looks sustainable and premium valuations might sustain. Additionally, government's focus to improve credit growth through credit outreach programme and continued traction in PLI schemes augur well for domestic economy. Higher government's capex and revival in industrials' capex should continue to aid economic recovery in the medium to long term. However, liquidity driven market may take a backseat in 2022 and investors must start focusing on quality aspect of companies, in our view.