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In October 2001, the world was living through a period of flux. Tech spending was slowing down considerably in America. In the aftermath of 9/11, the US military had begun a bombing campaign against Taliban forces, officially launching ‘Operation Enduring Freedom’. Tech companies were bracing for what was going to be a daunting three years.
When asked about the future of India’s IT industry, then Infosys CEO, N.R. Narayana Murthy said famously, “ There’s fog on the windshield.” Time to revisit the phrase.
As 2021 draws to a close, much of the bluster that the year began with has faded for the stock market. Brokerage reports titled ‘Making money from stocks will be tough in 2022’ seem to be laying both the ground and expectations for what is looking like an uphill climb for equity markets.
Let’s take a look at all the moving parts and what shape and form they’re taking.
In 2020, the Sensex rallied 15.75% and the Nifty climbed 14.90% , making it the best year for the indices since 2017. 2021 closes with as good a running. Both the Sensex and Nifty are up approximately 20% each. In fact, it is the midcaps that really found their place in the sun through the last two years. For the year 2020, the Nifty Midcap and Nifty Small cap Index both snapped a two-year losing streak and in 2021, midcaps close with handsome 35% gains. It is fairly clear what investors don’t like at this point – the Bank Nifty sees the lowest gains this year, masking the deep cuts many individual stocks have seen. Inflation, rate swings, a return of NPAs, right now there’s too much stacked against the banks. The other noteworthy mention is IT stocks. Clearly head and shoulders above the others in their price performance, the IT Index closes the year with a whopping 55% rally.
So where’s the problem one may ask? The Nifty 50 has now receded about 6% and counting from an all-time high in October. The fall marks a breather in an almost one-sided, liquidity-driven rally that’s lasted about 18 months. The single most important ingredient that unleashed ‘animal spirits’ in the stock market was money. At last count, in December so far, foreign institutional investors or FIIs sold stocks worth Rs 12,986 crore or $1.7 billion. Not just is that a large outflow, it is also the third consecutive month of foreign fund outflows. If, as seems the case, December closes with outflows, it would be the first time since late 2016 that the Indian market has seen back to back selling over three months.
What does this data mean, why are these figures important? The lifeblood of emerging markets has been a steady and generous gush of money coming into stocks. A sharp pivot would mean both losses and a degree of panic especially in stocks that aren’t widely held and make exits difficult.
Why are they selling so intensely would be the next natural question to ask. Imagine you’re at a really fantastic party, until someone announces music, food and drinks stop in the next 30 minutes. What do you do? Wind down, head out. Basically, the party comes to a close.
In its mid-December meeting, the US central bank said it would double the reduction of its monthly asset purchases to $30 billion, concluding the tapering programme by March 2022, as against the previous timeline of mid-2022. They also voted in favour of at least one interest rate increase in 2022 in contrast with their September 2021 decision not to hike interest rate till 2023. In other words, the money party is coming to a close.
Inflation has the Fed worried and given a choice between checking how retail prices are going up versus boosting the economy, they’re going with the former. This automatically makes the US financial markets a more attractive investment option compared to us, but here’s the clincher. When no one else knows, the rupee knows. By mid-October the rupee had hit a 15-month low. By the close of this year, the Indian rupee will be Asia’s worst-performing currency. In a vicious and self-fulfilling cycle, the currency declined 2.2% this quarter as global funds pulled $4 billion of capital out of the country’s stock market. As available data suggests, that’s the most among regional markets. Maybe the first quarter of the coming year sees some of this fall correct, but it remains a maybe.
Some argue that domestic flows have done a laudable job at keeping the market afloat. Domestic mutual funds (MFs) pumped in an astounding Rs 76,779 crore (about $10.2 billion) into the markets this year. A large chunk of this money actually came in via new investors. Several opened Demat accounts for the sole purpose of applying for IPOs. Many have never seen a downcycle or high volatility. I believe 2022 will be the year to stress test the ‘long-term investors’. And we don’t yet know which way that will go.
The ‘V’ word
The most often used word in any conversation about the markets is valuations. They can be fair, overstretched, undervalued – all depending on which side of the argument you’re sitting on.
For market participants who explain the current fall in the market and the accompanying outflows on “stretched valuations”, I say, please give me a break. Valuations and stock prices on several names have been out of whack for a long time now. The only difference was, the money train was still chugging. So if the market is to be recalibrated, using a valuation barometer, there is certainly some more cleaning up required. Having said that, I would also add that 2022 is genuinely the year to double down and work harder at stock identification, actually studying the potential of a company and making decisions based on the inherent value of a business, rather than a WhatsApp tip.
The grand IPO circus
Nothing and no one shone brighter than the IPO market this year. Sixty-five companies have listed so far in 2021, cumulatively raising over Rs 1.35 lakh crore. Sliced another way, we saw more IPOs in 2021 than in the year past three years combined. Also safe to say a majority of them got a resounding welcome. Zomato, Nykaa, MTAR Technologies, Paras Defence and Space Technologies (oversubscribed 304.26 times for those interested), the list is long and winding.
The primary market was even besting its secondary market rivals in money interest. Cumulative flows of FPIs into Indian equities in the first 11 months of calendar year 2021 were at $6.28 billion. Of that figure, $9.02 billion has come through IPOs , while $ 2.74 billion were the net outflows from secondary markets. It would be incorrect to say the Paytm listing debacle spoilt the pitch for future issues as many IPOs have followed the big one, and done reasonably well. What the Paytm incident did do, is raise the question of how these issues are priced.
A few days back SEBI chairman Ajay Tyagi said there was a need to protect retail investors in IPOs where companies are loss-making. He pointed to more explanation on the basis of pricing in the document as a good idea especially for the new tech companies. While the notes are a gentle chide at this point, they lead clearly to the rash of tech unicorns we saw listing this year where questions about profitability were scoffed at.
It is time to exercise abundant caution in the primary market. When money turns tight, I don’t believe even a third of these companies will get either the attention or the valuations they currently demand.
So where from here? The first few months of the year are generally very high activity for financial markets. Earnings season kicks off for companies, the Union Budget is presented in Parliament, year-ending taxes are collated. What we have in 2022 is a cocktail of uncertainty. The Reserve Bank of India remains curiously sanguine about the ‘temporary nature’ of inflation and I am not sure how long that line will sustain; retail inflation rose to a three-month high of 4.91% in November, while wholesale inflation zoomed to 14.23%. Weakness in the rupee is weighing on the bond market, political chatter will get increasingly loud and all-encompassing ahead of State elections in Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur.
COVID-19 and its multi-headed variants remain an overhang on both sentiment and economic activity. And of course, to top it all, money flows have a large question mark against them. Added to all of that is the dizzying charm that alternate arenas like crypto trading promise for young and hungry investors.
Is the stock market headed for a sell-out? Will 2022 mark a bear market? Will the Fed have a change of heart? Is it time to sell, not buy?
To return to that famous quote by N.R. Narayana Murthy, “I don’t think anybody has a crystal ball.” The honest answer is no one knows yet. The obvious thing to do then would be to build shock absorbers in the system. Check your portfolio, go through a process of spring cleaning and choose between those where you’ve made decent returns and can afford to book some profits. Remove the chaff from the wheat on stocks that were bought on tips and are now bleeding. And on the IPO market, look before you leap.
If the last two years have taught us anything, it is that neither can you plan for every eventuality, nor do you have a large degree of sway over the outcome. Stay safe, stay masked. In the words of Ralph Waldo Emerson, “Money often costs too much.”