2022 in review: Eight key factors that moved stock market this year

Despite geopolitical uncertainties, high global inflation and consistent selling by foreign investors in India, domestic flows remained resilient helping the benchmark indices hit new all-time highs this year.

Here are eight key factors that moved Indian stock market in the year 2022:

1. Omicron wave

We entered the year 2022 with a third wave of coronavirus in India led by Omicron infections. The number of infections reached a peak in January 2022, post which the wave receded. Since then many variants of Omicron emerged in 2022, but thanks to the immunity gained, none of them resulted in a wave.

Now, at the end of the year a new variant resurfaced – BF.7. The new variant was behind the sudden rise in infections in China and in some other parts of the world. Experts are now in wait-and-watch mode if it can cause a wave in India too.

2. Russia-Ukraine war

As the concerns around coronavirus infections receded in early 2022, Russia announced a ‘special military operation’ in Ukraine marking the start of a full-scale invasion of Ukraine. The attack by Russia was condemned internationally with many countries imposing sanctions on Russian trade.

The United States announced new military aid for Ukraine recently and vowed to disrupt Russian ties with Iran, which a British envoy said involved Moscow seeking hundreds of ballistic missiles and offering unprecedented military support in return, reported Reuters.

The war is ongoing and is nowhere close to be coming to an end. Experts fear that if the war worsens or extends for too long that will not go well with global market and Indian stocks, too.

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3. Global Inflation

Global central banks had kept a loose monetary policy and dovish stance for two long years since the breakout of coronavirus in 2020 to support growth. Even before the world could come out of the impact of the pandemic, Russia attacked Ukraine. As a result, the commodity prices started to rise leading to higher crude prices which had a cascading effect on food prices and other products and services.

Among other repercussions of Russia-Ukraine, global inflation has been a very big one in the aftermath. The world faced a synchronized inflation outbreak as food and energy prices surged in Asia, Europe and US.

US inflation surged to as high as 9%, while in India the number was around 6-7%.

If inflation does not start to slow, we are looking at an uglier scenario. Fortunately, we believe there are already convincing signs that inflationary pressures are moderating and will continue to do so in 2023, said JP Morgan Asset Management in a recent report.

With central banks ratcheting up their response to a global inflation shock, debate is shifting from when they’ll win the war to whether faster rising prices are here to stay in a supply-constrained world.

4. Fed rate hike

In a bid to curb high inflation, the global central banks started to lift key benchmark rates. In the light of high inflation and steep increase in central bank interest rate around the globe, US dollar started to gain strength.

The Federal Reserve and other central banks have been fighting inflation which surged due to supply chain shortages and an energy crisis due to the COVID-19 pandemic and Russia’s invasion of Ukraine.

The Indian rupee ended 2022 as the worst-performing Asian currency with a fall of 11.3%, its biggest annual decline since 2013, as the dollar rocketed on the US Federal Reserve’s aggressive monetary policy stance to tame inflation, reported Reuters.

In November, US Fed indicated that it will reduce the amount of interest hike, but did warn of sticky inflation saying that rate hikes will continue for some time.

Even in the Indian Reserve Bank of India warned of inflation remaining high for longer than anticipated time duration.

5. Europe energy crisis

The year 2022 was a challenging one for the European countries – be it on humanitarian grounds or financial fallouts.

The bloc grappled with Russia’s invasion of Ukraine and its financial consequences such as high inflation, deep energy crisis and slowed growth.

To condemn the attack on Ukraine, European countries put out sanctions on Russia and reduced trade of fuel supplies such as oil and gas from the country.

The European nations scrambled to find alternative supplies when Moscow switched the Nord Stream 1 pipeline off to retaliate against sanctions.

6. Massive FII selling

The tighter monetary policy by US Fed and other global central banks led to risk-off sentiment among foreign investors, who started to pump in money into safe haven assets such as US dollar and gold.

With lesser liquidity in the system, foreign institutional investors withdrew money from riskier emerging markets such as India. And the Indian equity market paid a high price for that.

Though much of the flows did return to Indian market later in the year

7. Resilient domestic flows

While high global inflation, FII selling and coming out of a post-pandemic world posed big problems for the Indian market, the only factor that supported the Indian equity market was high inflow from domestic channels.

During the pandemic, a lot of new retail investors entered the market and continued to keep up participation even in 2022.

Another factor for domestic flows on the Dalal Street was inward facing economy due to post-pandemic era in 2022 and geopolitical uncertainty internationally. High inflation, slowing growth in US and Europe were some of the other global concerns keeping investors positive about domestic economy.

Domestic flows into Indian equities remained resilient in 2022 helping the benchmark indices hit new all-time highs this year

8. Slowing growth, recession

After the central banks started tightening the monetary policy, the concerns of a hard landing emerged. Experts are predicting a modest slowdown or a recession in the US in 2023.

Economic growth in Europe already started to slow in 2022.

The International Monetary Fund cut global growth forecasts again recently warning that downside risks from high inflation and the Ukraine war were materializing and could push the world economy to the brink of recession if left unchecked.

Global real GDP growth will slow to 3.2% in 2022 from a forecast of 3.6% issued in April, the IMF said in an update of its World Economic Outlook. It added that world GDP actually contracted in the second quarter due to downturns in China and Russia, a Reuters report said.