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Monday 3 January 2022

Welcome 2022

2021 started with hope. Hope that the pandemic would be behind us and we would be able to get on with our lives. That bubble burst midway through the year. May-June this year was one of the most difficult times that we as Indians have seen in a long time.

Economic growth inches back

In terms of the economy, India inched back to growth relative to the previous year. PLI schemes were announced which are likely to have a long-term impact on manufacturing in India. On the negative side, income inequality has continued and probably gone up with new reports of increased uptake of MNREGA jobs in total and also by people of a lower age than before. The SME sector has seen a lot of hardship in the last two years, especially large job-generating ones such as hospitality, entertainment, aviation and transportation. The other big event which dominated the political and the economic landscape in India was the three agriculture reform bills, the prolonged farmer protest and the eventual repeal of the laws. This also is likely to have longer-term repercussions as politically difficult reforms will become more challenging to pass.

Geopolitics plays a critical role

Some of the biggest global news was about the US presidential elections and the return to power of the Taliban in Afghanistan. Renewed focus on climate change with the 2021 United Nations Climate Change Conference, more commonly referred to as COP26, being held in Glasgow, will shape large parts of business in the coming years.

China has now emerged as the foremost adversary of the ‘western world’. With the second largest economy in nominal GDP terms and already the largest in PPP terms, although like India it lags a lot in per capita terms simply because of its huge population. And this year China has been at the forefront of economic and political news right from its real estate crisis starting with the Evergrande group, its crackdown on its education sector, restricting foreign listing of its domestic companies and the back-to-socialistic values has impacted both global business and investment sentiment. There are a number of articles in respected global newspapers on businesses that are quietly reducing their China operations and expats leaving China.

I have written about the four megatrends before and it is interesting to observe the changes in narratives across those areas.

IPO market continues to sizzle

The primary market in India and globally has been red hot in 2021. Globally companies raised $1.44 trillion in equities alone which was 24% more than 2020, which in itself was a record year. In India we saw for the first time loss-making entities as well as some new-age businesses starting their market journey. Zomato, CarTrade, Nykaa, Paytm, Policybazaar and Fino Payments were notable among them. The depth of the market increases with every new IPO as investors get an opportunity to invest in something new. Valuations for new IPOs have been steep, sometimes ridiculous, but over time they tend to fall in line with the company’s performance.

NSE and LIC are the two big IPOs expected in 2022. Other notable ones expected are SBI Mutual Fund, Delhivery, Byju’s, PharmEasy, Oyo and Ola. All of this will happen provided the secondary market holds up as investor sentiment in IPOs is directly proportional to gains being made in direct equities.

Even though valuations are stretched in public listed markets, there seems like a bubble in the private markets.

2021 saw a total of 65 IPOs (incl REIT, INVIT) and raised 131,437crs. The record IPO collections were driven by Zomato, Paytm, Nykaa and Policybazaar collecting nearly 39,000cr.

An equal-weighted IPO portfolio would have given a 24% return, which is the same as Nifty in 2021. So, the IPO investors did not do much better than the good-old index in generating returns.

The future, as always, us uncertain

The “Covid” rally that we have seen over the last two years was fueled largely by large doses of liquidity. Now, with persistent inflation across the world, central banks are slowly and reluctantly pulling the plug on the liquidity flow. This can definitely temper down the rally in risk-assets like equities and commodities.

The ever-changing virus keeps us guessing. At times, to me it seems to behave like the market!! The moment you think you have it under control, something new crops up and you are back again where you started. I just hope that 2022 sees the last of the virus.

I believe that 2022 could be a difficult year to make money from equities. Not that any other year is particularly easy, but once in a while, you get a few years where it becomes slightly less daunting. Like cricket, once in a while, you get a full toss on the leg stump 😉

On the bright side, Indian companies have deleveraged extensively over the last 5 years. Corporate balance sheets are now looking better after a long time. Credit growth is picking up, investments are also picking up. The government has managed to garner up revenues and reduce expenditure such that the fiscal deficit at 6.6% is lower than planned. This is likely to lead to some expenditure from the government side on infrastructure and other social sectors. Traditional “value” sectors are likely to revive after many years of sub-par performance.

My job as an investor remains the same. Trying to find good quality businesses for the long term, keeping an eye out for medium term opportunistic bets and try out new quant-based strategies. All this while trying to learn new things like NFTs, DeFi, CBDC and such things. All while trying to ensure that we don’t lose money.

Thank you all for being part of my journey. Wishing you a very Happy New year.



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