While 2021 was a rollercoaster ride for the equity markets, especially with the arrival of Omicron on the scene, the big question on people's mind now is the fate of the stock markets in 2022. What should investors expect? Nikhil Kamath, co-founder, Zerodha & True Beacon, in an email interaction with Business Today, points out how going ahead this year, investors could expect higher volatility and, therefore, should tone down their return expectations as well. He further argues that while mid- and small-caps could see higher volatility than large-caps, there would be still be stocks in the segment that would outperform their larger peers. Edited excerpts.
BT: A large section of market participants, in their outlook reports, have stated that returns from Indian equity this year would be much lower or subdued when compared to that of 2021. What is your outlook for equities in 2022? Nikhil Kamath (NK): The Indian markets were among the best performing emerging markets in 2021 despite the pandemic. I don't see Indian markets performing the same way in 2022. Overall, we should expect higher volatility for Indian equities with tempered down return expectation. Investors must be very selective about each stock they pick. Investing in the index or a sector probably won't drive home returns the way it did in the past year. BT: Mid-caps and small-caps were in the limelight last year as they gave stellar returns. How do you see that segment performing this year? NK: Historically, mid-caps and small-caps have given good returns in certain market cycles but then also greater downside in others. They have outperformed last year and, although, we expect volatility to creep back into the markets and impact this sector more than large caps, there will always be stocks which will outperform and become future large-cap leaders. BT: Between October and December, FPIs were net sellers at $5.12 billion. What do you attribute the outflows to and how do you see FPI flows in the coming months? NK: To focus only on the outflow between October and December would give a polarised outlook, whereas the bigger picture would show that we’ve had sustained much higher net foreign inflows for the last couple of years. The greater part of 2020 until March 2021, saw a net inflow and the outflow in the last few months could have been a period of profit booking, doubled down by global inflationary pressure which could have triggered investors to fly to safety by moving away from emerging markets into developed markets. We’re still net beneficiaries of foreign inflows and we don't see this reversing in 2022.
BT: Any sectors that you are more bullish on than others? And which ones are you advising investors to stay away? NK: On a relative basis, the private banking sector has not gained as much as other sectors and should outperform with a credit uptick in the economy. Given the current books of banks, an increasing interest rate cycle should be a mixed blessing and adversely impact their business less. Even from an NPA standpoint, I would say private sector banks have a more robust balance sheet even after taking into account the COVID-19 related restructuring. When it comes to the auto and power sector -- I am a little more cautious. One fundamental reason for this is because of all the talk around EVs. Traditional power sectors that depend on exhaustible resources and which are highly leveraged may find it difficult to adapt. Similarly in auto, some players may be more agile and can make that shift to EV when the time arises. The impact of the new variant on the sales of passenger vehicles versus commercial vehicles is also something worth keeping an eye on. BT: Many believe that consumption, investment, and exports -- often considered to be the three key drivers of growth -- will fire this year to boost the GDP growth and thereby improve investor sentiments and equity returns. Would you agree with this? NK: I think the markets have already factored in future cash flows that are going to be generated soon, so in a sense, I think investor sentiment won’t shift drastically. The markets have not reflected inflationary pressures even though energy, oil, and food grain inflation are on the rise for months now. So, I think optimism about future growth is already in place. Even if we see growth and recovery on the ground, I will say that it’s already been factored in for the most part. BT: 2021 was a record year in terms of new client additions as well. Do you expect the influx to continue in the same magnitude or expect a slowdown if there are corrections or markets remain range bound? NK: The vault created in lockdown and change in how businesses run today has given a new perspective to retail investors, which has led to an influx into the stock market and financial markets in general. We don't see outflows being too aggressive but the influx we’re seeing now is cyclical and happens once every few years. We may not see inflows continue at the same pace. However, we don't expect to see a massive reduction in market participation either. BT: How do you look at the listed start-up space in terms of investment potential or valuation? The coming months would see more start-ups launching their IPOs. How should investors look at such IPOs? NK: The markets overall are sitting on lofty valuations, and I think 2022 may see some correction taking place. People seem to justify these expensive valuations, especially ones we’ve seen in recent IPOs based on long-term growth prospects for the company. But I don't think they pay enough heed to the shocks, competition, and disruptions these companies must weather. Personally, I think that when these issues are factored into valuations, we can then arrive at a more reasonable multiple. BT: With True Beacon, you tried to disrupt the alternative investments fund (AIF) segment. How has True Beacon One performed? What are your plans in the AIF segment? Are you planning to launch more funds? NK: We have been operating for a little over two years now, and in these two years, we have seen two extreme sides of the stock market. In the first year of operations, we saw that the stock markets returned almost nothing, and in the second year, the markets gave abnormal returns.
Considering both these years in the stock market, True Beacon’s performance has been more stable across the same period. In the first year, we outperformed the Nifty and in the second year we underperformed by a margin, but when you combine the two years, our returns were better distributed over the period with significantly lower volatility than the markets. So True Beason concentrates on efficient distribution of returns while trying to hedge the markets.
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