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Published on: Jan. 12, 2022, 7:13 p.m.
Where to invest
  • The Sensex has given positive returns 23 times and negative returns only eight times

By Daksesh Parikh. Executive Editor, Business India

Every year, in January one question which often gets debated is: where to invest? As if the change of a calendar page really makes a significant difference as to one’s asset allocation strategy.

Business India has, over the last several years, been bullish on equities. Equity has been amongst the best asset class, giving very good year-on-year returns for small investors. Long term investors, who have been investing over decades in equity, know that it is not easy to continuously lose money in equity if the selection is relatively satisfactory. One has to have patience and remain invested through multiyear cycles. 

Since 1990 when the Sensex first started being officially published, returns have been phenomenal. In a little over three decades, the Sensex has gone up from 1,027 to nearly 60,000 – almost 60 times. What is noteworthy is that the Sensex has given positive returns 23 times and negative returns only eight times. Of which in one year it was just -1 per cent. The Sensex has not given negative returns for two years in a row, except in 2000 and 2001.

It is true that every investor does not mimic Sensex stocks. But in any portfolio construct, some large cap stocks are required. Be they Reliance, HDFC, Tatas or Birlas. With the financial sector having a near 40 per cent weightage in the Sensex, exposure to the financial sector is required, be it SBI or ICICI Bank, Axis or Kotak Mahindra Bank. 

It is not, however, only the Sensex which has been soaring over the years. Even the broad markets are showing similar growth trends. The BSE 500 which constitutes more than 90 per cent of the total market value of all listed stocks on the BSE, has seen growth of 12x in the last 20 years, a year after the BSE 500 took birth. 

The growth in shares is more than the growth realised through investment in gold. The average price of gold (24 carat) was Rs3,466 per 10 grams in 1991. Currently it is around Rs48,000. A gain of under 14x over 30 years, much lower than the Sensex gains. Over the last few years, gold as an investment through the gold bond scheme, is gaining popularity and it may make sense to invest through these bonds for portfolio diversification. In 2022, a lot will depend on how interest rates move in conjunction with inflation, globally. 

While gold provides a good hedge against inflation, higher interest rates on gilts may be a spoiler for gold returns. It would still be advisable to invest small amounts regularly in gold bonds which are simpler and easier to invest in than buying physical gold. The rising price of gold also makes buying in bulk a difficult option. Earlier, gold prices used to be quoted for 10 grams; the soaring prices have seen them being quoted for one gram. 

For many investors, sparing time to study a particular company and forming an opinion is pretty time consuming and not everyone’s cup of tea. For them mutual funds are a better option and have provided a good alternative. For investors looking at geographic diversification, several mutual funds allow investors to invest in Apple, Microsoft or Tesla through a special mutual fund. But this is more for fanning one’s ego and boasting that we have a stake in some of the leading tech companies of the world. The low value of the rupee vis-à-vis the value of the USD or pound or euro and the volatility in the forex markets work against the investor, even if it is through the mutual fund route.

Property, till recently, was not really an investment for the small investor. It is more complicated than buying and holding financial assets. The cycles of property are far bigger than shares or even gold. One can claim that property prices in some pockets or urban areas have gone up by 10x or 12x. But the initial sums invested are much larger.

And irrespective of whether the property could be rented out or not, the maintenance charges and local body taxes had to be paid. It is only more recently that fractional investment and REITs have allowed investors to invest in this asset class. For most small investors buying one’s own residential house was a bigger challenge and few could, till recently, think of buying another property for investment. 

Stock trends for 2022

Forecasting trends in the stock market is difficult at the best of times. It is indeed a mug’s game to predict the Sensex 12 months in advance. One reason is that there is a dynamic interplay of diverse factors which influence markets. It was difficult even when the Indian economy was secluded. Now, with the integration with the global economy, it is virtually impossible to form a view with reasonable certainty. Experts’ views are also divided, which is as it should be, otherwise, if everyone was optimistic there would be only buyers and few sellers at a particular price.

Differing and sometimes totally contrasting views are required for the orderly functioning of the market.  “I am very gung-ho about India. This decade will be India’s decade,” says Vishal Tulsian, MD, Motilal Oswal Private Equity Fund, India’s first institutional home-grown PE fund, managing over $1 billion of assets, with a likelihood of doubling them shortly.

The returns on the reforms undertaken over the last decade will manifest themselves over the next 10 years. This will be the decade of manufacturing, he says, adding: “The world at large wants to see India grow as an alternate source.” The China Plus One strategy will really help India scale up its manufacturing across sectors. The penetration of the internet has played out well as has the proliferation of smartphones. The Make in India and PLI schemes will spur further growth. As India moves towards its $5 trillion target, Tulsian expects to see a massive shift in consumption patterns. The tide for real estate is also changing and this will be very good for building materials.

The panic in the initial part of the Covid-19 pandemic really provided the ground for the spectacular growth in 2020 and 2021 with hope soon eclipsing panic and everyone investing heavily in the market. The newer breed of investors, who were more tech savvy and well-read, also took to investing in shares.

This did provide them with a good chance to growth their wealth. While many of those investing through mutual funds have stayed invested even when the markets dropped sharply, the fact is that most of them have only seen prices rising. Will a correction of 15-20 per cent change their perceptions about the markets and see them follow a risk-off strategy in 2022? One view is that investors who have faced the onslaught of FII sales over the past few months may not really panic. Several of the experts with whom Business India spoke were equally optimistic.

“2022 looks extremely positive,” says Deven Choksey, MD, K R Choksey Share and Securities Private Limited. “One big positive is that the government is aggressively rolling out projects, large and small. This will give a boost to the capital goods industry as also to other companies in the industrial sector. Banks will have a good year and they will be more comfortable lending to companies whose order books will start filling up. Two industries which look extremely good are IT and pharma. In the latter I would prefer API and CRAMs. In the Infra 5G rollout, companies which will benefit are Sterlite and Himachal Futuristic. Those companies with good IT in the front end and manufacturing in the back end will see better rating. Bajaj Finserv and Bajaj Finance are two companies I would look at. I am also very positive on Reliance Industries as the different verticals of the company will start contributing in a big way. 2022 will, however, be different from 2021 where almost anything and everything moved only in one direction – upward. This year the low hanging fruits will not be there.”

“2022 will be a classic stock picker’s market” says Azeem Ahmad, Head PMS, LIC Mutual Fund. The PMS collectively manages around Rs2,000 crore of assets comprising of equity and debt, largely for government institutions. Ahmad, who was earlier with ICICI Securities PMS and previously with ICICI Research for around 12 years, looks after equity schemes.

“The last 18 months, till July 2021, were a dream run. Thereafter we saw sector rotation. I believe sector rotation will continue in 2022. New money will flow in cement, material and capex-related companies. The aggressive fund managers will bet on cyclicals while the conservative ones will look at banking and pharma. IPOs, in 2022, will do well like in 2021. BSE 100 and BSE 200 will undergo a face change with more tech companies coming in. I would not be surprised if Flipkart came to the markets. Most tech companies are priced to perfection and only long-term investors should enter.” 

Negative factors

One of the big worries is that large IPOs which are slated during the calendar year 2022 including those of LIC, PSU divestment and several tech companies could possibly see attention focussing more on the IPOs. After all savings are finite amongst any group of investors, old or new.

“2022 will be tough year compared to 2021. Returns will be muted in single digit or even marginally negative,” says Jyotivardhan Jaipuria, founder and MD, Valentis Advisors Pvt Ltd, one of the leading PMS companies in Mumbai. One of its schemes, Valentis Rising Star with an AUM of Rs350 crore was ranked no 1 in giving returns of 113 per cent in 2021. Jaipuria is convinced that a consolidation of gains over the last 18 months will be witnessed in 2022. He lists two negative factors: Expensive valuation and central banks’ policies which will end the era of low interest rates and easy liquidity.

“Interest rates will rise faster, both globally as well as in India.” He expects the RBI may hike rates at least twice this year. On the positive side Jaipuria feels: “We will see a multiyear strong phase of growth which can well double over the next four-five years.” While earnings will be decent, he feels returns will mirror earnings. Some of the commodity prices which are still at elevated levels will impact the margins of some industries. “Despite decent economic growth and good corporate earnings, markets may correct themselves in 2022. It will, according to me, be a normal year and several first-time investors who have yet to come to terms with the fact that returns in the market are not always moving upwards, may get the experience of a normal intra-year correction of 10-15 per cent.”

The US Fed has already turned hawkish and a hike in interest rates may commence sooner than expected. However, it will still be a difficult task for all central banks to mop up the excess liquidity sloshing the global markets. While some part of fund diversion to debt is bound to happen, will equity be quickly dumped in favour of debt? Unlikely.

In the case of emerging markets, it will be difficult to hike interest rates to a level that could actually throttle growth. If anything, the government’s policies are tuned to impart a growth impetus in the economy. Globally too, governments of several countries including USA, UK, EU and India have committed to spend trillions on infrastructure projects. With investment demand kicking in in countries like India, this demand, coupled with robust consumption demand, will result in good GDP growth. 

Sundeep Sikka, ED and CEO, Nippon Life India Asset Management Ltd, one of the leading mutual funds with an AUM of R2.84 lakh crore as on November 2021 is also optimistic on investment demand driving the economy. “2022 is likely to be a year of normalisation where cyclical recovery will continue to hold shape with hopefully less supply side or pandemic-driven distortions. We expect the growth momentum to be sustained, led by a revival in urban consumption and capex. Capex growth will be initially led by government and later by private sector capex. The housing market is showing enough signs of revival.The only segment which is showing some weakness is rural consumption. We expect government to continue to support the rural economy via various well directed schemes.” 

Sikka feels that the reforms initiated by the government whether PLI schemes, national infrastructure pipelines and also India’s potential inclusion in the global bond index, will bear fruit in 2022. Corporate sector profitability is likely to remain robust and profit to GDP will keep inching upwards. With normalisation in the economy there will be an upward bias on rates. Low real interest rates would induce investors to keep their high exposure to risk assets like equities and real estate. Sikka is also of the opinion that sectors like banks, IT services, capital goods and select discretionary sectors offer good risk reward. “Since valuations are not inexpensive, returns expectations should be moderate and investors should have a balanced asset allocation approach.”

Constructive on equities

One might say that investment demand and commitment to infrastructure is all discounted by the markets. What next? Says S Ranganathan, Head Research, LKP Securities: “With the impeding liquidity tightening globally and eventual rate hikes known, investors will now look forward to the Union Budget on 1 February to provide the impetus on infrastructure spending and accelerate the capex cycle, given the buoyancy seen in tax collections.  It is true that the headwinds arising from the third wave of the pandemic and its impact on supply chains of corporates will remain a key risk. However, we remain constructive on equities in CY2022 despite moderating our expectation post the two stellar years behind us. Investors are betting well-run franchises will continue to reap gains in continuation of the trends witnessed in CY2021. The China Plus One theme coupled with the PLI scheme should ensure high growth for exporters across sectors.” 

Financials, which lagged behind earlier, should make a comeback, as will India-centric industrials and diversified corporates which have deleveraged and stand to benefit from value migration from the unorganised sector.  

Each expert in the markets has his own theories of what will work or not work. The themes which they have at the beginning of the year may change. In a dynamic market the investor is required to remain agile to gauge the impact of changes happening globally and domestically. Crude oil remaining around $80 per barrel may be factored in by the markets but a flare up by 15-20 per cent may well upset calculations. Metal prices as also building material, including cement, are at elevated levels and are likely to remain so over the next few years with demand emanating from new projects.

Companies which have, over the last few years, deleveraged themselves may well try to lock in capital in anticipation of higher interest rates in the future. Reliance Industries recently raised funds globally in a bid to pay off higher interest-bearing securities. Going by the demand for quality paper, others may follow. With demand making a comeback, consumption demand, both from rural and urban areas, is bound to spell good news for companies.  Profitability is bound to rise. 2022-23 could well see private sector investments picking up. 

More than anything else the government is doing its best to take advantage of the China Plus One policy. Its PLI schemes in various sectors should also bear fruit. Moreover, with the government keen to push the disinvestment of PSUs and tap capital markets for funds, it is unlikely that it will do anything which will queer investors’ sentiments.  Private equity, which had a very good year for exits through IPOs, could well see an encore in 2022. In which case more IPOs of good companies can be expected.

Irrespective of whether the face of the Sensex changes, with more new age companies replacing some traditional ones, investors can look forward to another exciting new year ahead. Whether overall returns are in single digit or double digit does not really matter. Instead of being awed by the index movement one has to focus on the share price movement of one’s own portfolio to see its returns and growth. 15-20 per cent year-on-year growth is an achievable target for 2022.

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