Market Report Card for 2021
Best performers in 2021
Worst performers in 2021
Figures are % change till 24 Dec Source: Value Research
It was also the year of the IPOs when 62 companies raised a record Rs 1.2 lakh crore. This included the Rs 18,300 crore Paytm issue, the biggest ever IPO in the history of Indian capital markets. Many IPOs listed at handsome premiums, but Paytm is trading 30% below its IPO price. While equity investors were partying during 2021, debt investors had nothing to smile about during the year. Except for the credit risk category, all other debt fund categories delivered insipid returns.
As we enter 2022, equity markets are looking precarious and debt markets are expecting rate hikes. We reached out to experts to know what investors should do in such a scenario. This week’s cover story looks at 11 steps that investors should take now to improve their finances in the New Year.
We hope you find it useful. Wishing you good health, prosperity and safety in 2022.
1. Reduce allocation to equities
With markets looking overvalued, experts are advising a tactical cut in equity allocation.
The stock market is yet to hit its intermediate bottom, but analysts expect a bigger correction in 2022. Rising inflation has led to rate hikes by global central bankers. “The rally in the last 18-20 months was largely due to monetary easing. It is being withdrawn now,” says Deepak Jasani, Head of Retail Research, HDFC Securities.
The emergence of Omicron is also worrying markets. Global markets had rallied after countries started vaccine programmes, hoping that the vaccines would control the pandemic. But it seems we will have to live with the coronavirus for some more time. This will hurt sectors such as hospitality, aviation and entertainment.
Some market participants hope that Omicron will force central bankers to postpone rate hikes, but the possibility seems remote. “Inflation is no more transitory and may go well into 2022, so central bankers may continue with rate hikes. The RBI is expected to increase reverse repo rate in February 2022,” says Unmesh Kulkarni, Managing Director and Senior Advisor, Julius Baer India.
Meanwhile, foreign portfolio investors (FPIs) have withdrawn more than Rs 36,000 crore from equities in the past three months. While some of this has moved to other asset classes, a good chunk has shifted from India to other emerging markets. The Indian equity markets are trading at a premium valuation compared to developed markets and other emerging markets (see chart), so FPIs are booking profits.
Technical factors are also indicating continued weakness. The Nifty is now trading below its 30 September closing value of 17,618. If it doesn’t recover and cross this level before 31 December, it will be the first negative quarter after March 2020. “Negative quarterly returns, if it happens, indicates that the correction will be for the entire rally that started in March 2020,” says Jay Thakkar, VP and Head of Research, Marwadi Shares & Finance.
The ongoing correction may continue for 1-2 more quarters, so investors can consider reducing their equity allocation now. For some investors, the relentless rally might have skewed their asset allocation towards equity. They should book profits in equities to restore the original allocation mix. Others might have taken aggressive bets and gone overweight when stocks crashed in early 2020. “If you had earlier taken an overweight call on equity, bring it down to your strategic asset allocation levels now,” says Kulkarni. Since the relative valuation is still high, investors can also go underweight on equity. “A tactical allocation out of equities is needed. We suggest 15% less compared to the strategic equity allocation,” says Kunj Bansal, CIO, Karvy PMS. If the equity allocation was 75%, bring it down to 60%. If it was 50%, bring it down to 35%.
The valuation premium is high
Foreign portfolio investors are booking profits and moving to other less costly emerging markets
2. Go for export-oriented sectors
These will benefit from the US dollar strengthening against the rupee.
The market is expecting a rate hike by the US Fed, which has led to the strengthening of the dollar against the rupee. The US dollar has rallied 3% in the past three months and is now close to its all-time high level of Rs 76.87 that it achieved on 16 April 2020. Just like the equity markets, the forex market is also expected to be very volatile in 2022 because of the various signals coming from several central bankers. The recent rate hike by the Bank of England was against the market expectations and had put negative pressure on the rupee. “Due to worries about quicker rate hikes by global central bankers, there could be some more depreciation in the next 1-2 quarters and the US dollar may go up to Rs 77 in the short term. However, the situation should improve in the second half of 2022,” says Arun Singh, Chief Economist, Dun & Bradstreet India.
Rupee weakened against $ in 2021
Exporters will benefit from this
What could help the rupee? India may get added to the global bond index which could lead to dollar inflows. “After the initial weakness, the rupee is expected to end 2022 around the current level and the increased inflow due to bond index inclusion. If the bond index inclusion doesn’t happen, the dollar will end the year above Rs 77,” says Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank.
IT sector rose more than the market in 2021
Since IT stocks have already run up quite a bit, buy them on declines
A weaker rupee will help exporters. Exporters are already seeing the benefit of the rupee depreciation. But that is just one of the factors helping exporters now. “In addition to the depreciation in rupee, exporters are also benefiting from factors like the PLI scheme, China plus one policy adopted by global companies, etc. If you want to remain invested in equity, exporters are one of the good places to hide,” says Jasani.
Within the exporting sectors, most experts prefer the IT sector. “The IT sector is expected to outperform because of the increased demand,” says Bansal of Karvy PMS. The sector has already rallied significantly in the past one year (see chart). “Exporters are likely to benefit from the rupee depreciation. Though the IT sector is not cheap, its outlook is constructive. Since it is relatively better positioned compared to other sectors, consider buying IT companies during corrections,” says Kulkarni.
Investors should be more careful with other exporting sectors. Pharma stocks may be volatile due to US FDA approvals. Similarly, rising shipping costs have cut the margins for traditional export sectors such as textiles and chemicals.
3. Shift to short-term and floater funds
A hike in interest rates seems imminent, which will not bode well for medium and long-term funds.
After many years of softening bond yields, 2021 saw yields climb up on fears of rising inflation and higher government borrowing. Even as the bond markets were spooked, the central bank itself held firm on interest rates and maintained accommodative stance.
Going into the new year, however, the persistent price pressures and improved growth outlook could force the RBI to rethink. Analysts expect the normalisation of liquidity and hike in interest rates sooner rather than later.
While bond markets have seemingly pencilled in a couple of rate hikes, the possible divergence in the timing, the extent and the pace of these actions will keep markets volatile. “We expect considerable divergence in the actions of the central banks and the expectations in the bond market thus resulting in increased volatility in the coming 6-9 months,” says Arvind Chari, CIO, Quantum Advisors.
Govt bond yields moved up during 2021
In this backdrop, investors are advised to remain anchored towards accrual strategies. Traditional accrual funds—those generating returns primarily from interest earnings—are considered a reasonable safeguard against interest rate volatility. “The best way to play the rate hike cycle is to focus on the short maturity segments of the market. Low market risk, cash equivalent returns seems to be best bet from a risk-return perspective,” opines Chari.
Debt funds gave insipid returns in 2021
Ultra short-term bond funds and liquid funds are least vulnerable to capital depreciation even if interest rates rise. Also, since these park money in securities with very short maturity of up to 3-6 months, the portfolio gets refreshed quickly, allowing the fund to capture rising yields in the near term. Experts advise against incremental investments in duration strategies. “Cut down duration of your existing portfolio and reduce allocation to roll-down strategies to gear the portfolio for 2022,” advises Prashant Joshi, Cofounder and Partner, Fintrust Advisors LLP.
Experts also favour floater funds, which invest in floating rate bonds that reset coupons at regular intervals. The interest rate is pegged to a reference benchmark rate, with a spread added to the benchmark rate to arrive at the actual coupon rate. With every change in the benchmark rate, the rate offered on the floating rate bond also changes. Since the payout is reset according to prevailing rates, the fund can potentially gain from rising rates.
R. Sivakumar, Head – Fixed Income, Axis Mutual Fund, says floater funds can be expected to do better than traditional bond funds, for two reasons. “Floating rate bonds…
Read More: 11 smart money moves investors can make to improve finances, make more money in 2021