A year of living dangerously, in every sense of the term, draws to a close. Lives lost, businesses shuttered, human resolve tested, yet wealth created. A year when science answered the questions asked of it, even as it prepares now for a sterner examination. These are times of great uncertainty yet investors appear sanguine that as long as they know the cause of uncertainty it cannot rock their boat, at least not enough to hurt. Secure, they remain, in the knowledge that the warden, who has the power to turn off the music, remains trapped in her own policy tower, for fear the revellers could burn the whole castle down were their party interrupted. This is how investors enter the new year, dancing wildly on a lake of frozen ice, drunk on the unexpected booty of the year gone by.
2022, then, has the prospect of a good game of snakes and ladders. The question is whether investors will still end up in the top corner of the board, despite encountering some fearsome anacondas on the way. They just might, for we are in a bull market, after all, which is meant to climb the ladders, giving snakes the slip.
That said, it may not be an easy year. For even as stock market investors are quick to scoff at anything but the ‘unknown unknowns’ they forget that even a detected cancer can kill. Merely knowing a risk does not necessarily eliminate it, as an easy money-fed bull market may have lulled them to believe. On that note, the pandemic may yet have surprises in store, not least because the Western world has myopically chosen, as is its wont, to ignore the Covid-19 crisis in less fortunate countries. If Omicron is a sign that the virus will keep mutating elsewhere and simply keep coming back, maybe even evading vaccines, then it may not be as transitory a risk as many believe. That has implications for a growth recovery and yes, even asset prices. Such little is known about this virus even today that it is ironical to hear people dismiss it as a ‘known unknown’. Scientists don’t, stockbrokers do.
The other possible cause of turbulence, again belonging to the known devil category, is inflation, global and local. So far, RBI seems content to prioritise growth, but come next year it may feel the heat of falling behind the curve on tackling prices. The saving grace is that both these risks will probably not materialise together, for if another major Covid-19 wave lashes us, central banks will not be able to raise rates. And so, unless a major surprise happens on the inflation front, this risk may inject periodic volatility but not derail the bull market.
By their very definition, unknown risks cannot be foretold, but an era of easy money has created so many distortions and bubbles that an accident can happen anywhere. Valuations, in pockets, are so extended that an unravelling is always a touch away. The world’s leading electronic signature company Docusign recently lost 40 per cent of its market value in a single hour of trading after its CEO sounded somewhat circumspect about the next quarter’s growth. So much investor wealth is tied up in the Teslas and Bitcoins of the world that one needs to be ever wary of blowups.
Yet investors needn’t be too gloomy, particularly in India where after many years there is the prospect of a new earnings cycle. In a way, the Covid-19 shock may have marked the bottom of the protracted downcycle Indian companies had been working their way out of. Balance sheets are cleaned, tax rates have never been better and even capacity utilisations are on a slow climb in many sectors. This is what the stock market has been pricing in and why valuations appear stretched on any yardstick. And that is a headwind for investors in 2022, almost an obverse of the unknown unknown theory. Once a market prices in the known known, it often does not respond when the anticipated growth is delivered. After such a strong run in 2021, markets could easily tread water, soak in the volatility, as it dodges the bullets and waits for growth to catch up. There have been years in the past, particularly after a very good run, when stock indices moved up and down a lot, without making much headway, as it digested past gains. The ladders and snakes could cancel each other out, leaving players where they started.
So, what should investors do? The most important thing is to stop thinking of what could go wrong, as that will only shake them off course. There are just too many imponderables at this juncture, with few clear-cut answers. Much better to focus on the little one can map with some degree of confidence. In doing that, it is essential to avoid the trap of taking for granted a full-fledged capex cycle like 2003-2007. There are some green shoots but no overwhelming evidence to suggest this yet. And therefore, it may be better to focus on themes where structural change is visible, even at the risk of going in too early, or paying a bit extra.
Is the world going through a massive digital transformation? Indisputably, yes. The best in class tech disruptors are listed in the US and it is possible for Indian investors to buy them, more so as inflation fears look set to trigger a sharp, and overdue, valuation compression in them. And while not in that league, it isn’t impossible to find Indian companies which are participants or enablers, in this shift. They needn’t be mindlessly valued digital unicorns but even less exciting service providers facilitating this transition to Cloud. IT, then, should do well in 2022 and any volatility that skims some froth off their suddenly lofty multiples will only make it more attractive. It may also be prudent to not ignore the new digital listings altogether; some of them are genuinely good businesses in strong niches and will go on to create a lot of wealth. Just be wary of the ones with a ‘let’s get the money in, will figure the business later’ model. That’s the eyeballs model, and you know how that ended last time.
Not just IT, winds of change are sweeping across many industries. Investors will do well to sidestep stodgy old sectors like oil, cement, auto, mining, even traditional banking and focus instead on ones with conversion tailwinds. The names which will herald India’s renewable energy switchover. Companies which will benefit the most from the upcoming electric vehicle revolution, maker or provider. Firms which will successfully tap the China plus one opportunity, particularly in chemicals, pharmaceuticals and electronics. India’s youth have warmed up to the need for financial savings and products, and a clutch of providers will compound wealth wonderfully as more and more young investors buy all sorts of financial products. Yet, people need homes to live in too. After seven years, the real estate sector is waking up from slumber, taking with it a whole range of sectors which depend on it.
So, 2022 may be turbulent, even unnerving in parts, but a portfolio built of these themes—Cloud, digital, chemicals, financial inclusion, new energy, auto transformation and housing—will yield a king’s ransom over the next five or six years. The world is in the throes of a seminal transformation, and the scale of value creation by new technology adopters on one hand and destruction by tech laggards on the other, will be astonishing. Just the terrain for bold and patient investors to make a fortune. Valuations may not be your friend, but the sheer velocity of change may be.