The Signal : From The Research Desk: Five Predictions (Maybe) and Five Action Points for Investors in 2022

Come 2022, global economics and capital markets are slated to enter an exciting state. The state is transitionary. The transition will be tremendously volatile – exciting for a few and anxiety-inducing for the rest. While it is too early to comment on full restoration of public health, the jury is still out on whether the Central Banks will shoot for inflation with its tightening policies or simply kick the can down the road in a gambit for economic recovery. The decision could swing in any direction. To be honest, at this juncture, my guess is just as good as anybody else’s. There’s a lot riding on this factor.

There is always a multitude of variables that define the trajectory across various capital markets, only now there are more ‘if-then’ nodes added along with newer levels in the decision tree. However, weighing the developments, a few situations can be anticipated with a fair sense of confidence.

1. The RBI will have to act in line with domestic context. Cues from the west may not necessarily incite similar action back home.
2. It is almost certain that inflation will continue to remain at outer levels (or beyond) of current target ranges. The question no longer seems to be ‘if’; it is ‘why’. With time, academicians and practitioners will decide if history should pin this onto overheating or supply challenges.
3. Impact of the imminent taper tantrum on equity markets is overrated, on fixed income markets is underrated.
4. Most good news has been priced-in; hopes stand guard against bad news. The risk-reward in broader equity segments is skewed negatively. This is not a bad thing, just an indicator to prepare for increased volatility and an exhausting climb ahead.
5. With increasing real rates, even real estate could finally see some uptick while the upside for gold will remain largely capped.

While we will cover the state and prospects of multiple parameters shaping the economy and capital market segments in greater depth in the Jan’22 edition of our monthly report – CapView, here are a few tactical decisions that should help investors navigate the upcoming period effectively. This is not a substitute to core principles of risk-alignment, asset allocation and efficient diversification.

1. In light of developments on policy rates, sovereign and corporate bond yields, fixed income investors can invest in funds with an effective maturity of 3 to 5 years following a roll-down strategy. A mix of PSU, SDL-backed papers offer strong quality to the mix. For investors with a shorter investment horizon, a tactical allocation to corporate bonds with lower credit ratings up to AA and shorter duration should pump returns from the debt component.
2. An uptick in credit cycle and expansion-led increment in private capex should augur well for lenders, especially in the business of financing capital intensive industries of infrastructure, utilities and capital goods. An uptick in demand for residential real estate will benefit financiers in the form of higher revenues and improved margins.
3. Export-oriented technology and pharmaceutical companies stand to benefit from broader economic advancement and domestic currency prospects.
4. Diversification into developed markets like the U.S. may offer some resilience to the portfolio in case things go sideways, but caution must be exercised to not over-allocate and lose out on the longer-term domestic growth prospects.
5. While the upside for gold is largely capped, it will prove to be an effective hedge against a highly-probable stagflationary environment and depreciating domestic currency.

While the turn of a year is a great time to utilise the holidays to take stock of your personal finance but let’s not forget that it is not a magical date that will change things significantly. Most developments will continue developing the way it was to, anyway.

We sincerely hope that investors revisit their portfolios, re-align with their risk profile and investment objectives. We are more than glad to be of any assistance. All you need to do is write to us at research@fisdom.com and we will look forward to helping in any way we can.