Investor’s approach in year 2022
Last year was a golden year for the stock investors. There was 22.14%, 44.34% and 57.45% annual gain in the NIFTY large cap, Midcap and Small cap Index respectively, without major sharp corrections. Stock picking was a no brainer as any investment made during the year has given more than decent profit. Primary market was buoyant and IPO opening gains were unbelievable.
Can the investor expect the similar returns and smooth upward ride in year 2022? Considering the various developments, the answer most likely is ‘NO’. Let us observe key macro factors why the answer is ‘NO’. The central banks all across the world are reducing the liquidity, have hiked the interest rates or have announced the schedule of hiking the interest rates. The inflation, which was understood as transitory, is going to stay considering the supply chain bottlenecks across the world. Manufacturing capacity utilization is low and is not going to pick up so soon as the new highly infectious virus strain ‘Omicron’ has already started unfolding its pangs and its impact will be visible in coming months. To add to the woes, the Booster vaccination program is behind the curve to restrict its spread that could have limited its impact on the economy. The current valuations are elevated when compared to long term averages.
Does it mean that the Bull Run is over and investor should divest his holdings (partial or full) or become over defensive? The answer is again ‘NO’. The business cycle is turning favorable and the corporate earnings are on upswing causing deleverages from these corporates, NPAs of the financial sector have reduced considerably, the Government has announced various schemes to support the growth. However, investors would not have an easy ride as was in the previous year.
A prudent investor can adopt the following 7 principles to have another rewarding year ahead:
- As the current stock prices are elevated, stock picking would not be as simple as it was in the previous year. Investing should be stock specific with deeper understanding of business, management, market and financial attractiveness. Investing as per the latest fads, social media tips but without real business understanding is full of risk.
- Investor should base their decision to buy stocks purely based on the fundamental valuations and not in the expectation that someone would buy it at higher price.
- Lot of new age IPOs are coming this year, which would be strongly promoted by the Company and the Investment bankers alike. The quest would be not to get carried away by the market blitz and colorful selling. Understand the business, its competitive edge, financials, and valuations before investing. Alternatively, it is better to wait for its listing for price discovery and than decide.
- Asset allocation is critical in the volatile heated market to conserve the gains. In previous year the equity returns were phenomenal. Now, Investor can reduce their equity exposure by converting 15%-20% equity to Cash, Gold or Short-term Debt. This would restrict the losses during sell off and would provide the investor an option to re-invest when the valuations are comfortable.
- Ever since the demonetization and introduction of GST, Indian economy is getting more formalized, thereby Industry leaders and big companies are getting stronger than their smaller peers. This is further hastened by the digitization and the covid pandemic. During the market corrections, it is the smaller companies which get hit the most. So, prudent investor should increase the large and mid-cap weightages in the portfolio.
- Investor should taper down this year’s return expectation and reconcile that the previous year was exceptional for various favorable factors. This will prevent one to make risky investments. Decent risk adjusted return should be the guiding principle instead of investing in ‘Hope’ to hit ‘Four and Six’ on very ball.
- Focus on the sectors which are neglected or have not performed well for long time and now things are turning favorable like Reality, Construction, Engineering, Banking. Telecom and Industrial etc. However, selection should be stock specific and should meet criteria defined earlier. (Refer our earlier Blog)
Wish you a fulfilling and rewarding year ahead!
