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Stay Invested, Stay Diversified
Stay Invested, Stay Diversified
Ajay Bagga - 28 December 2021

After getting most forecasts wrong in December 2019, forecasters were too conservative in December 2020. After a 2021 that was horrendous in terms of lives lost and infection numbers but spectacular in terms of 865 crore vaccines being administered globally, we are approaching 2022 with a lot of hesitant optimism.

These are unprecedented times, and no textbooks have a chapter on what happens after a global pandemic hits. The economy initially crumbles and the central bank and government respond by flooding the economy and financial markets with many trillions of dollars. It sounds almost as far-fetched as declaring in the early days of the pandemic, when the S&P 500 Index cratered 34 per cent in a matter of weeks, that investors would not only be made whole in a few months but would enjoy one of the most powerful bull markets in history along with a real estate boom, despite the death toll surpassing that of the devastating 1918 pandemic. All this happened and no one, not even the best-informed central banks and governments, got it right.

Different Strokes, Different Folks

We look at 2022 from a world of contrasts. Developed countries are covering their populations with a third booster dose, while millions in the poorest nations have not got even their first shots. Global debt levels, central bank balance sheets, household savings levels all increased massively while most asset classes did very well, except for precious metals. At the same time, income and social inequality levels have reached disconcertingly high levels with the asset-owning wealthy minority pocketing most of the gains, while the masses facing the stark reality of job losses and dipping savings.

Central bank perspectives range from a mad hatter Turkey cutting rates in the face of a surging inflation and fast depreciating Lira to a Russia raising rates by more than 4 per cent. Within the Big Four, too, we had the US Federal Reserve pivot four times to a finally hawkish stance, the Bank of England hiking rates despite a pandemic-high Omicron-induced infection number, while the European Central Bank and Bank of Japan staying determinedly dovish.

On the geopolitical divide, the US-China, US-Russia, EU-China, EU-Russia, US-Iran, China-Taiwan and a whole host of other flash points remain potential hotspots that can flare up at any time.

On the economic front, global GDP surpassed its pre-pandemic level in 2021 and completed the transition from recovery to expansion, aided by strong policy support, deployment of effective vaccines and resumption of economic activities. In 2022, global GDP is anticipated to grow around 5 per cent, forming the strongest back-to-back years for the world economy since the early 1970s.

On the pandemic front, the Omicron variant’s rapid spread has led to lifetime-high numbers in South Korea, South Africa, the UK and parts of the US. The risks are high that the reopening and expanding phase of the economic cycle may once more be checked by strict lockdowns for a couple of months to control the spread.

With the huge toll of 273 million global infections and 5 million global deaths, the catastrophic history of the last two years of the pandemic understandably makes governments and citizens wary and conservative.

China is slowing down with its bloated property sector seeing defaults and falling prices. A combination of regulatory action on new-age companies, policy tightening and heavy-handed action on climate change issues has led to a fall in the economic growth trajectory of the country, which has global ramifications.

Global liquidity is on course for a peak around March 2022. We expect a further stimulus by the G-4 central banks of $750 billion over the next three months. Their balance sheets will then reach peak levels. Markets are likely to reach a high around the same time and face downward bias as the earnings cycle in China surprises very negatively and the US dollar remains strong.

We expect a further stimulus announcement by China to counter the domestic slowdown in early 2022.

Looking at India, we have entered a period of an economic growth cycle. We expect the housing cycle to accelerate into a 7-8-year growth driver for the economy. Private capex, which lags public capex by around six quarters, is expected to revive in 2022. India is expected be the fastest growing large economy in the world in 2022. And as the federal government completes three years in power, 2022 will be a critical year to launch initiatives towards its re-election quest of early 2024.

What Does This Mean For The Indian Investor?

The simple message for these times is: stick to your asset allocation. If your equity allocation is above your ideal asset allocation levels, sell the extra bit and rebalance into other asset classes. There are no correct answers.

The best strategy in these unprecedented times is to diversify widely and stick to your asset allocation. No panic selling but no FOMO (fear of missing out) or loading up near a potential top either. A slow and steady, disciplined investing style is the best bet.

Any correction in the markets due to inflation, valuation and the US Fed rate hike should be used to add cyclicals. I remain overweight on domestic cyclical sectors like financials, property and autos, and expect markets to hit a new high in 2022. My index forecast for 2022 is a high of 19,500 on the Nifty and 72,000 on the BSE Sensex. But I expect a 10 per cent correction during the year as well. Commodity prices will remain elevated. Gold will see another few months of underperformance and then start a slow recovery. Oil prices will remain high.

The Reserve Bank of India (RBI) is likely to raise reverse repo rates in March and raise the repo rate over FY2023 by around 75 basis points. Inflation is likely to stay high in the 5-5.5 per cent range due to the oil price impact.

Real estate prices are expected to see double-digit appreciation on the back of end-user and investor demand.

The IPO market will remain buoyant with the LIC IPO leading the way. Funding for the digital economy will continue both from the private equity funds as well as in terms of public market listings through IPOs.

That is a whole lot of crystal ball gazing done bravely when the forecasting records of the last two years have been particularly bad. Think through all these possibilities; think what can go wrong for you personally and prepare your financial plan for the same. And do hope for the best outcome while preparing for the worst. Stay invested, stay diversified, and stay safe in these uncertain and challenging times.

The author is a Private Investor and a Market Expert.

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