Stock Market Outlook

Economic & Investment Trends To Consider In 2022

CHERUKURI KUTUMBA RAO

02-01-2022
v “You never can predict the economy. You can't predict the stock market.” Peter Lynch

v “The influence on stock prices are so numerous and so complex that no person has ever
been able to predict the trend of stock prices with consistent success.” John Templeton

v “No one, not even the most experienced trader, economist or businessman can predict
with certainty the course of the stock market.” Bernard Baruch

v “I deal in facts, not forecasting the future.” Peter Lynch

v “We don't buy and sell stocks based upon what other people think the stock market is
going to do (I never have an opinion) but rather upon what we think the company is going
to do.” Warren Buffett
 Global Scenario
COVID-19, inflation and many other cross currents are on top of mind for the economy, the coming year will provide both
challenges and opportunities. Here are some of the top trends investors should watch for:
1. The ongoing COVID-19 pandemic
The Omicron variant has created a fresh speed bump for the global and U.S. economies. How much it will slow down economic activity
remains to be known. COVID-19, which caused the economy’s cratering nearly two years ago and resulted in the loss of millions jobs in
March and April 2020, is still the most important factor to the economy’s current and future performance. The recovery quickly gathered
momentum, only to be slowed by the Delta variant with new downside risks associated with Omicron since Thanksgiving. Among more
positive developments, more people have taken the COVID-19 vaccine and booster, and new treatments are becoming more available.
The pandemic has lasted longer than almost anyone would’ve thought, affecting lives, livelihoods, the economy and personal finances.
Despite the challenges, economies of many countries are expected to be above par for both 2021 and 2022.
What to watch: Will COVID-19 continue to weigh heavily on our health and the global economic recovery, or could we see the much-
hoped-for end of the pandemic and more normalization of the economy?
2. Rising inflation
The cause of the economy’s sharp and short retrenchment, and the subsequent reopening, is also part of the reason behind the big
increase in prices seemingly for just about everything. Supply chain disruptions, the imbalance between supplies and demand for goods
have forced consumers to dig deeper into their pocketbooks. And it has weighed heavily on consumer sentiment. In fact, a recent survey
found that inflation is the top constraint on everyone’s outlook for their personal finances in 2022. Most economists and the US Federal
Reserve look for inflation to cool in the coming year.
What to watch: Will inflation, as measured by the Consumer Price Index and other metrics, begin to fade in the coming year, resulting in
less strain on household finances?
3. Rising interest rates
Seeing inflation flaring at the highest levels in years, the US Federal Reserve decided at its December meeting to speed up its
taper of asset purchases. In simple terms, this is basically the central bank taking its foot off the economy’s accelerator. Tapering
is necessary before raising interest rates from their current record low levels. As for the timing and extent of rate hikes, members
of the Federal Open Market Committee are signaling that there could be as many as three rate hikes in the coming year, with the
possibility of more through 2024. That would translate to higher costs for borrowing and more generous returns on savings.
Another result could be less risk-taking by investors, or less of the “search for yield” dynamic that has helped lift stocks, the
major market averages and other asset prices including cryptocurrencies (before the recent pullback). Keep the seat belt
buckled for the possibility of more volatility in stocks.
What to watch: Will the U.S. central bank, as expected, raise interest rates as many as three times in 2022?
4. US Midterm elections
While the memory of the 2020 presidential election may still be fresh on mind, midterm elections loom on Nov. 8, 2022. Among
the spoils: Every seat in the U.S. House of Representatives is up for grabs and so are about a third of those in the Senate. At
issue is whether Democrats retain control of the House of Representatives and what happens with their razor-thin Senate
control. Here’s why it matters: If Democrats retain some measure of control of Congress, President Joe Biden will have greater
ability to get his legislative priorities approved. If they do not, Biden will likely face an even more challenging political logjam.
Republicans blame fiscal stimulus for the rise in inflation, explaining their opposition to new legislation. Democrats are eager to
address social programs with the “Build Back Better” legislation stalling at the end of 2021.
What to watch: Will Republicans take control of either the U.S. House or Senate in the November elections, affecting prospects
for the remaining two years of Biden’s term?
What to expect in Indian Stock Market in 2022?

Ø Nifty and Sensex to hit all-time highs.

Ø The rally might not be as strong as in 2021 in a lower liquidity environment.

Ø The resurgence of Omicron and the rise in Covid cases across the Globe make case for Central Banks

Ø Not going for a significant monetary tightening in 2022.

Ø Sectors like Chemicals, Banks, Pharma, Textiles, Auo Ancillaries, IT & BFSI should do well in 2022.

Ø Power, Railways, Defence and Oil & Gas sectors will remain attractive from a mid to long term perspective.

Ø Some major global concerns can play spoil sport for India. Inflation would be the biggest issue across the globe.

Ø The year ahead could also see small-cap and mid-cap stocks do some catching up in market capitalization

valuations, after lagging behind their large-cap counterparts in 2021.

 Model Portfolio
Making predictions about the stock market is always a tricky endeavor, and 2022 is no exception.

• Volatility is here to stay – As markets correct after touching the highs and losses start to loom, it becomes difficult to avoid taking
emotional decisions to cut these losses. This behavioural mistake can be detrimental to creating long-term wealth. Your first defense
against these mistakes is to craft a diversified portfolio across different asset classes that match your investment horizon and risk
tolerance. During times of market volatility, while your risky investments – equities (domestic/global) may fall, the overall portfolio
performance may not be so badly impacted. A diversified portfolio built of complementary assets helps you smoothen out the returns
in volatile times and helps mitigate risk in the portfolio.

• Model portfolios curated on investors’ risk-return profiles are best suited in volatile market conditions. The portfolios can be built with
different weightage between cyclical and non-cyclical stocks. The returns of the portfolio are average weighted returns, i.e. the returns
tilt towards the sector that has more weightage in the portfolio. Focus on the below aspects while investing:

• Sector Diversification – Model portfolios are diversified among various cyclical sectors like banking and finance, auto, metals,
infrastructure, and real estate. Non-cyclical sectors consist of IT, pharma, FMCG, and consumer goods.

• Market Cap Diversification – Market Capitalization is another factor that needs to be considered while picking stocks. These
portfolios are well balanced between large-cap, mid-cap, and small-cap stocks. Large-cap stocks are stable and generate moderate
returns. Mid-cap and small-cap stocks are more volatile and have the potential to generate higher returns.

• Portfolio Rebalancing – Equity portfolios require rebalancing since the risk and returns are highly associated with market volatility.
Portfolio rebalancing helps to book profits in outperforming stocks and invest in underperforming stocks that have the potential to
generate higher returns.
 Baskets of Stocks and ETFs
Avoid buying a single stock. When markets rise, it is easy to have FOMO and rush in on the next “hot” stock, be it an IPO or a
“value” stock someone tells us about. Instead, look at investing in baskets. A basket is a set of multiple securities that can be
traded in a single order. The components of the baskets are selected based on a particular strategy or theme. They are
curated and are based on research done by professionals whose day job is to do just that. An investor can select a pre-defined
basket or create a custom one based on her preferences.

A few baskets are described below based on various risk-return profiles:

• Low Risk – Multi-asset Basket

Investors with a low-risk appetite can choose to invest in a multi-asset basket. This can be a combination of equity, debt, and
ETFs. Rebalancing this basket helps to combat concentration and volatility risks. A periodically rebalanced multi-asset basket
can earn slow and steady returns to meet long-term financial goals.

• Medium Risk – Diversified Sector Rotation

Various sectors come into the limelight based on the economy. Sometimes Pharma may do well, and at other times defensive
stocks may do well. Being able to go over-weight (or under-weight) on a sector works wonders on generating an Alpha (out-
performance). Having a curated basket that has a sector rotation strategy would do very well in volatile conditions.
Points to Remember:
Massive crashes are followed by sharp rebounds
An important lesson from stock market history is that a sharp crash is followed, more often than not, by a sharp rebound. Stock
market often overreacts: both on the upside and the downside. During the euphoria of a bull market, valuations reach unsustainable
levels, leading to a sharp correction. The panic during a crash takes valuation to very low levels, which in turn leads to buying,
triggering recovery. This pattern repeats. This has implications for investors.

Expect moderate returns in 2022

Returns in 2022 are likely to be moderate. Therefore, the focus of investors should be two fold: one, look for segments and stocks
that can generate market-beating returns, and, two, invest patiently for the long term. New variants of the virus and rising interest
rates may pose challenges in 2022. Market corrections triggered by these challenges may turn out to be buying opportunities.

Beat the market with focused investment

In 2022, the prospects for IT, financials and construction-related segments look good. The valuations of financials, particularly that
of leading banks, are attractive thanks to sustained FII selling. IT is in a multi-year upcycle triggered by accelerating digitisation. IT
valuations are high, but earnings visibility is very good. Low interest rates are driving a boom in construction, which would benefit all
construction-related stocks. Focus on high quality stocks in these segments can generate market–beating returns in 2022. Invest in
mid and small-caps through mutual fund SIPs (systematic investment plans).
4 resolutions for 2022
IPOs: No money-spinners
The trend in 2021 signals that retail investors madly chased IPOs to make a quick buck on listing day. Most of the IPOs witnessed
robust response from retail investors, thanks to easy loans from banks and NBFCs. While some of the IPOs did not disappoint investors
and did give whopping listing gains, a few of them did burn their fingers. However, given the current elevated risk levels, retail investors
should use their funds more judiciously this year. Retail investors should also restrict themselves to invest only their own money in IPOs
and that too in fundamentally sound companies.
Low price isn’t a bargain
Some retail investors buy beaten-down stocks such as those at 52-week lows, believing that they are bargains. Retail investors should
bear in mind that there are over hundred examples of beaten-down stocks that never bounced back. On the contrary, most of them
continue their slide relentlessly, leaving a big hole in investors’ pocket. Investors should not buy a stock simply because it is available at
low price.
Betting on new-age stocks
Of late, a lot of new-age companies have performed well at the secondary market and have attracted retail investors. The businesses or
revenue models of these companies are complex, with limited visibility on profits. However, some retail investors are buying them due to
fear of missing out on the rally. Past experience suggests stocks from so-called sunrise sectors tend to crash after initial euphoria. Do
not dabble in unknown territory without understanding the basics of the company.
Don’t stop SIPs
The most important resolution should be on systematic investment plans. A lot of retail investors use SIPs to create long-term wealth.
However, when the market falls, they tend to stop their SIPs out of fear. Stopping SIPs midway is not a right decision and will affect their
returns because they will miss out on any market recovery. Investors should identify products that suit them best based on their risk
profile and stick to SIP plans.
What next?
So where from here? The first few months of the year are generally very high activity for financial markets. Q3 Earnings season
kicks off for companies, the Union Budget is presented in Parliament, year-ending taxes are collated. What we have in 2022 is a
cocktail of uncertainty. The Reserve Bank of India remains curiously sanguine about the ‘temporary nature’ of inflation and
nobody for sure knows how long that line will sustain; retail inflation rose to a three-month high of 4.91% in November,
while wholesale inflation zoomed to 14.23%. Weakness in the rupee is weighing on the bond market, political chatter will get
increasingly loud and all-encompassing ahead of State elections in Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur.
COVID-19 and its multi-headed variants remain an overhang on both sentiment and economic activity. And of course, to top it all,
money flows have a large question mark against them. Added to all of that is the dizzying charm that alternate arenas like crypto
trading promise for young and hungry investors.
Sector rotation is a normal part of the stock market, but in 2021 moves could last only a few weeks or even a few days. Investors
moved from one area to another as if they were afraid to lose gains. The year saw its fair share of breakouts that failed, and
once-promising moves that were short-lived. So, will the frustrating sector rotation continue in 2022? That's hard to say, but it is
definitely a risk.
The year 2021 has been a bumper period for the Indian primary market with 63 companies collectively raising Rs 1.2 lakh crore
through initial public offerings - the highest amount ever raised in a single calendar year. While slumping returns at year-end
should make for a more cautious start to 2022, there is still a cause for optimism, since downturns often lead to quality IPOs sold
at fair prices.
Investors can drive themselves crazy interpreting economic forecasts, analyst views and other information. But the best guide of
the market is the major indexes themselves.
 Caution should be the buzzword in 2022
Every Bull Run has its side-effect and the latest one was no exception to this phenomenon. The unprecedented rally in the stock market
may have brought cheers to the investing community. However, it has also raised concerns about a potential risk, particularly to retail
participants, arising out of unwarranted exuberance in illiquid, penny stocks that have been scaling dizzying heights on the bourses. Many
such stocks have emerged as multi-baggers despite poor credentials. This trend is akin to the frenzy witnessed during the dotcom boom of
2000, which saw many dud companies in the sector rally to abnormally high levels on speculative activity. A decade later shares of mining,
trading or export companies were targeted by the operators. Many small investors were lured to invest in a large number of penny stocks
only to find their hard-earned money taken away by smart operators, many a time acting in connivance with the unscrupulous promoters.
The current boom phase, it appears, is no exception to the victimizing tendency prevalent among small gullible investors. There are
indications that they may have been chasing penny shares of fundamentally weak companies, thereby risking their investment.
An analysis of the trading pattern in the current market shows share prices of many lesser-known or unknown companies have spurted to
unprecedented levels even though their fundamentals hardly inspire any confidence. Many such examples figure on the list of the stocks
that have consistently been hitting 52-week highs on BSE. The sharp gains could have been the outcome of normal trading practice
without a possibility of any foul play by the entities related or unrelated to the respective companies. Some possibilities such as
restructuring of operations, capital reduction, change in management, turnaround hopes etc could have been the triggers behind the spurt
in valuations. While these triggers may have their merit, they hardly justify precariously high valuations in some of the cases.
the jump in the share price of a company of unknown credentials, cannot be an accident or windfall but is possible because of
manipulations in a pre-planned manner by an interested broker and entry operators. The abnormal gains, however, have prompted the
exchange to keep some of them under surveillance, signaling caution to investors.
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