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The year 2021 in many ways turned out to be different that what was expected during the beginning of the year where at the same time last year when Vaccines were being rolled out I had thought that at the same time this year Covid might be over. However as I write the Omicron wave is on big time and daily cases are at the highest ever. There was also an expectation that Gold should do well given the increasing inflationary pressures all around however gold ended absolutely flat for the year. Stock Markets did very well even after a brilliant pull back in 2020 which was much better than what I expected. Indian Markets have now risen every year for the last 6 years which is a record. 2021 saw markets rise 24%. Our advisory products across long term investing, short term investing and trading generated huge wealth for our investors this year with massive outperformance in long term products and huge profits in short term plans.
So in a nutshell I believe making forecasts for what will happen in 2022 is futile. We need to make our views on the overall markets, stocks and sectors and play them in a manner that we do well. Bond Yields are finally moving in line with the growing threat of prolonged higher inflation worldwide. The US Fed has indicated that they will start moving faster than earlier expectations and my guess is that other central banks will do the same once the Omicron wave subsides as inflationary pressures driven by higher food, commodity and as a result wage inflation are becoming more and more entrenched. This will create volatility but not end the bull market.
In my view we will see a return of Value Investing this year. Growth investing driven by new generation companies with no profits and valuations driven by huge liquidity flows will be challenged this year. I expect a very tough year for Cryptocurrencies as they have largely been liquidity driven. There are nearly 13000 coins that trade in the market now. I expect 12500 plus to go to zero over the next 1-2 years. There could also be 10-90% falls in most of the others. As this plays out this year could be that of Gold which has completely gone out of the investors radar at this stage.
Valuations worldwide are likely to get challenged as liquidity reduces with the Market Capitalization to GDP for most markets trading at all time highs. However the key is that the bull market will still go on for some more time. The reason is that till interest rates become restrictive for growth I do not see growth rates revival getting challenged. The US Fed Funds rate needs to go to near 2% for that which is not likely over the next 18-24 months. However there will be deep loss in value in sectors favored by Venture Capitalists and PE’s where valuations are far beyond reasonable. On the other hand there will also be winners from these sectors that will be extraordinary multibaggers over the next 5-10 years. We will need to capture them as reasonable values come.
The key threats to the performance of the Indian Markets are
- Higher inflation leading to higher interest rates which could impact the valuations especially in high priced Growth Stocks
- Potential liquidity withdrawal by global central banks which has been the primary reason for the valuations moving up and money flowing into high yielding Emerging Markets over the last two years
- Very high earnings growth estimates which creates potential for earnings misses which at elevated valuations can lead to deep market cuts
- A selloff in the rupee if RBI keeps interest rates low at a time when other central banks start tightening
- A global equity market selloff as last year saw over $ one trillion flow into equity assets which was more than the last 20 years combined. Even 10-20% of outflows can create lot of volatility in the Indian Markets
- If Covid doesn’t end with the current wave and there are more waves it will impact economic growth as well as bank asset qualities
Positive factors
- Fiscal Deficit of the government seems to be well in control thus creating potential for stimulus if required
- Most companies have announced large capital expenditure plans and the infrastructure pipeline also seems to be strong which could propel fixed asset creation
- The first phase of rate hikes by global central banks leads to downsides, however till rates become restrictive normally markets bounce back and that is the most probable cycle that we will see
- Central bank tightening could rein in commodity price spirals which could address one of the biggest concerns of inflation
- FDI flows are very strong and can contribute to economic growth prospects
In this context my overall view on the markets is that global markets including India will see a selloff in the first half of the year and then a bounce later as interest rates would still remain conductive for positive economic growth. The concern is only about valuations and near term froth and overvaluation. From the investors perspective we should see a comeback in value stocks this year versus growth stocks as the valuation differentials between the two are at all time highs. The bull case scenario is for a 12-15% market growth this year and the bear case is for a flat overall market with some volatility. However such markets tend to be very good for stock picking which should work well in 2022.