Where to invest in 2022

The year 2021, hit by the worst of Covid-19, ended unexpectedly well for financial market investors. One reason was pick-up in GDP growth after the sharp dip in early part of 2020. While global economic growth is recovering, India will occupy the title of one of the fastest-growing economies, says Nilesh Shah, Group President & MD, Kotak Mahindra AMC. Real GDP growth is expected to be 9.5% in FY2022 due to lower base and bounce-back by businesses after progressive reopening of the economy. GDP had shrunk 7.3% in FY2021. Nineteen of the 22 high-frequency economic indicators such as index of industrial production are in the positive territory. Taking the cue, Indian stock markets did extremely well for a major part of 2021. The weight of Indian listed companies that are part of the MSCI Emerging Market Index rose from 8% in 2020 to 12% in 2021. Such hearty macro and micro indicators and decent capital market gains are great for investors. So, which asset class will give blockbuster returns in 2022?

It is tough to choose. Apart from traditional investment options such as equities, debt, real estate and gold, the digital boom during the pandemic has amplified retail investors’ interest in asset classes like peer-to-peer (P2P) lending, cryptocurencies and Real Estate Investment Trusts (REITs). Here’s how these assets may move in 2022.

Equities: Beating Inflation is Key

Nobel laureate Milton Friedman once said that inflation is a form of taxation as it eats into purchasing power. If your income rises 10%, but inflation goes up 15%, you will have to lower consumption by 5% to ensure that savings remain at earlier levels, says Swarup Mohanty, Director and CEO, Mirae Asset Investment Managers. “It’s important to beat inflation. Otherwise, despite decent returns, one can end up becoming poor in the long run,” he says. Equities have beaten inflation over the long term, he adds.

Equities have also done far better than other popular assets such as real estate, gold and fixed income by a wide margin in the last one decade. Nifty 50 rose over 21% in first 11 months of 2021. Small-caps returned nearly twice as much. NSE Small Cap 100 grew 62% in one year till November 30. Nifty 50 rose 31% during the period. Nifty Midcap 100 was up 50%.

However, expectations for 2022 should be moderate, given the high returns over the last two years. “We have seen phases of consolidation amid large bull markets in the past too. This is healthy as it prevents creation of bubbles. Nonetheless, medium-term outlook is strong,” says Mohanty. Any dips should be used to buy, he adds.

Nilesh Shah of Kotak AMC is neutral as he feels equities are fairly priced. He advises investors to remain marginally underweight on small-caps and mid-caps because of valuations and marginally overweight on largecaps. By neutral weight, he means booking of profits, if any, on overweight positions. He also thinks that every correction is an opportunity to increase allocation to equities.

A Case for Global Equities

Indian investors have also taken a fancy to global equities in last two years, especially post the sharp rally in international equity markets after the Covid-19 outbreak in March-April 2020. But there is more to it. While India’s economy is among the fastest-growing in the world, its stock markets are led by traditional sectors such as IT consultancy, financial services, petroleum and consumer staples. In contrast, new themes such as robotics, artificial intelligence, electric vehicles, cyber security, industrial automation, cloud computing, e-commerce and data centre are gaining huge momentum in developed world. “These themes are expected to shape our future and are, therefore, becoming part of portfolios,” says Mohanty. The shares of one the world’s largest companies in market cap, Apple, have returned 488% in last five years. Microsoft shares have risen 412%, Amazon 345% and Google (Alphabet) 251%, during the period.

“There is a strong case for international investing to protect investors from country-specific risks,” says Raunak Onkar, Fund Manager, PPFAS Mutual Fund. The sheer variety of themes available globally is mind-boggling. “Valuations can also be quite reasonable for similar opportunities compared to valuations in the home country due to scarce opportunities here,” he says.

Real Estate Take-off

Property prices are expected to go up due to continuously rising prices of raw materials such as cement and steel. “We have already started seeing a 5-10% rise depending on property, location and available stock,” says Anuj Puri, chairman, ANAROCK Group. ANAROCK Research says in Q3 of 2021, property prices in top cities rose by 1-4% on an average. Another reason is rise in operating costs due to additional safety protocols and expenses to take care of vaccination and other medical needs of workers. Additionally, in last one year, many developers have been able to clear their inventory after demand surge due to Covid-19, giving them elbow room to increase prices, says Puri. All-time low interest rates and discounts make this a good time to buy a house for self-use.

Investors, on the other hand, can look at REITs for exposure to commercial assets. “REITS are the only financially efficient and well-regulated conduit for mass/retail participation in commercial real estate,” says Rajani Sinha, chief economist & national director, Research, Knight Frank India. Rental collections have been good (98-99%) despite the pandemic as all three REITs available at this stage own high-quality office spaces. Another factor benefitting REITs is corporate governance. “All REITs involve global players that adhere to global practices in managing assets. Good office spaces with state-of-the-art facilities help them get good rentals,” says Puri. The trend is likely to continue in 2022 too.

Volatile Debt Market

The debt market is expected to hit a bumpy road. Despite a dovish stand by RBI’s monetary policy committee and emergence of new Covid strains, RBI may still be forced to increase rates faster than its latest guidance. “Persistent price pressures (inflation) will increase the pace of reversal. We pencil in two-three repo rate hikes by end of 2022. We can see GoI 10-year yield at 6.60-6.75%,” says Devang Shah, co-head, fixed income, Axis Mutual Fund. At present, it is at 6.35%. Shah expects yields at the short end (one-three years) to rise 75-100 bps and at the long end (5-15 year) by 30-45 bps.

This reversal, says Pankaj Pathak, fund manager, Fixed Income, Quantum Mutual Fund, will increase short-term rates. Long-term rates are already higher than the repo rate and may not move much. “We may not see much impact on long-term rates except for intermittent spikes,” he says.

With short-term rates going up, returns from liquid/money market funds should rise. Pathak says short-term and conservative investors should stick to categories like liquid funds to benefit from increase in rates in the coming months. “Along with liquid funds, the core fixed income allocation could be to short-term debt funds and/ or dynamic bond funds with low credit risk,” he says. He says bond fund investors should opt for a longer holding period to ride intermittent turbulence in the market.

Commodities – Few Takers

Commodity prices are expected to ease in 2022 after a bullish 2021. Fitch Solutions has forecast lower prices for most commodities due to tepid demand growth and improving supplies. Ferrous metals (iron ore, steel), thermal coal and oil crops (palm oil and soybean) will fall sharply, it says. Investors’ favourite, the yellow metal, is expected to follow suit, at least for the short term.

Gold has fallen from over ₹57,000 per 10 gm in August 2020 to ₹47,000 per 10 gm. The US Federal Reserve move to reduce monthly net asset purchases by $10 billion for treasury securities and $5 billion for agency mortgage-backed securities will add some negativity, says Kshitij Purohit, lead, Commodities and Currencies, CapitalVia Global Research. He sees gold between ₹46,500 and ₹52,500 in 2022. However, the recent omicron variant of coronavirus that has triggered fears of health crisis and growth slowdown may keep investors interested in gold. “Also, long-term gold investors will have the last laugh as a hasty taper could hurt growth and trigger market tantrums, making investors seek portfolio diversifiers like gold,” says Chirag Mehta, senior fund manager, Quantum Asset Management.

Silver May Shine Too

The white metal outperformed gold with 46.22% returns compared to gold’s 33.84% rise in FY2021. Further, Sebi has approved an amendment to mutual fund rules to enable introduction of silver exchange-traded funds (ETFs). Does this mean silver can replace gold in your portfolio? Well, not really. “Silver, because of industrial use, has a stronger relationship with economic growth. Thus, silver prices tend to move in tandem with equities,” says Chirag Mehta. In contrast, gold gets a leg-up during economic distress, when equities suffer. Thus, silver cannot be used to hedge against economic uncertainties. However, investors may take exposure to silver or other metals on a tactical basis, says Mehta.

Apart from precious metals, commodity investors with high risk appetite may also look at crude oil, which meets 60% of the world’s energy demand. Crude oil prices had touched almost zero in 2020. Now, they are at $85 a barrel. Prices have risen 45% in last six months alone.

“As per a recent projection of OPEC+, crude oil demand will not be hit because of new coronavirus variant. Apart from this, OPEC+ will introduce production cut plans for 2022–2023, which may also boost prices. Technically, crude oil is likely to continue its bull run if it breaks through the resistance of $85,” says Purohit of CapitalVia.

An Unconventional Boom Cryptocurrency has been in the limelight for massive returns generated by some of the coins. Bitcoin, the biggest and the most popular, has more than doubled in last one year, though it is down 32% from November’s all-time high of $ 69,045. Ethereum, the second-biggest in market cap, has grown six-fold in last one year. Experts are predicting another bull run if India brings in crypto regulations. “We are eagerly awaiting some clarity on taxation and filing in the crypto bill which will put crypto assets on a level-playing field with other investment avenues,” says Shivam Thakral, CEO, BuyUcoin. According to a Nasscom report, ‘Cryptotech Industry In India’, retail investors in India have put in $6.6 billion in cryptocurrencies, which is expected to rise to $15.6 billion by 2030. It says India’s crypto-tech market is expected to reach $241 million by 2030. Tech-based solutions such as launch of central bank digital currencies will make decentralised blockchains cheaper, faster, scalable and sustainable, says Nischal Shetty, Founder & CEO, WazirX. He sees huge gains by Metaverse applications with more tech giants participating in the field by either building or acquiring companies. Metaverse, as defined by Facebook, a huge stakeholder, is “a set of virtual spaces where you can create and explore with other people who aren’t in the same physical space as you.”

While the pandemic has brought many industries to their knees, the shifting dynamics have opened up new opportunities too. For example, P2P lending has thrived in the last six-seven years due to greater demand for small credit and the industry’s adoption of digital and technological advancements. LenDenClub, the largest P2P lending player which processes over 2.5 lakh loan applications a month, has witnessed 10X growth in lending (from ₹60 crore to ₹600 crore) between FY2020 and FY2021. In first six months of FY2022, it has disbursed more than ₹1,200 crore loans already. Bhavin Patel, Founder & CEO, LenDenClub, expects the market to grow 100 times within the next few years. “We expect two-three times growth in loan origination through P2P lending platforms in India in 2022.”

Clearly, no asset class is a consistent winner, say experts. That is why they recommend diversification based on risk appetite and goals. Also, do not fall for fancy investments unless you understand them and have a matching risk appetite. Remember the lines by legendary investor, Warren Buffet – “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”