Dear Investors,
I take this opportunity to wish you all a very Happy, Healthy, and Prosperous 2022 on behalf of the Ace Lansdowne India team.
2021 was a year of divergence and extremities. Equity market performances were largely driven by the developed markets, especially the U.S. and Europe, which significantly outperformed the emerging markets. Even with-in the emerging markets, where there was a huge disparity in performance amongst countries. There were big swings and rotations between cyclical value and growth styles. India's healthy equity performance was backed by best-ever domestic participations remained buoyant despite dull foreign flows.
I expect 2022 will be a more volatile year for equities. The U.S. and Europe will likely struggle with persistently increasing inflation, while growth may start to moderate in the second quarter as the economies enter late-cycle expansion. I sense a hawkish tone from central banks in the first half, as their playbook will change from transitory inflation to curbing inflation. Inflation will be more structural in wage growth, food prices, energy costs, and housing prices. That said, tighter monetary policies may be offset by a record number of fiscal stimuli, such as the infrastructure bill in the U.S. amid slower growth globally and inflationary pressures. In this background, what is in store for Indian markets?
Let's talk about that:
Two of the most notable trends in Indian equities in 2021 were – 1) Strong domestic inflows in equities & IPO and 2) Unicorn boom. Will they repeat in 2022 or not? Let
me put my view across this: Strong domestic inflows were driven by demographics, the covid situation has led to more disposable income in the hands of people, and
underinvestment in the equity market as an asset class cheered new sunrise for retail Indian investors to allocate more from their traditional investment allocation to
equities. The big question is this cyclical or structural? I bet on this being structural for the obvious reason as explained. In comparison, FPI flows were at $4 bn annually,
much lower than the last decade's average. SIP book in India is now touching $1.5 bn per month. This momentum is likely to continue will see the SIP book will remain
around $ 1.5bn a month, which will be offset against weak foreign flows.
I believe foreign inflows will be volatile in the coming year as the Fed tapers and inflation become more sticky than transitory as described till now. One pertinent question in our mind is how bad can be fed tapering for India? Since ghosts of 2013 are remain in the mind of equity investors. My simple answer is that the Indian Sovereign balance sheet has become very strong compared to 2013. Remind you in the 2013 taper tantrum, India ran a current account deficit of 5%, which led to a big correction and outflow from equities. Today India is a current account surplus which will put us much more strong position than we had in 2013. Also, in 2013, we were over-dependent on foreign inflows and huge imports. This time around, Fed tapering may create a knee-jerk reaction to Indian inflows, but it will not hurt the market as it did in 2013.
The second point, India has seen a euphoric year for start-ups and saw the birth of around 42 unicorns in 2021, compared to hardly 5-6 in recent years. Covid has been a huge booster for the Indian start-up fraternity, thanks to higher usage of internet and penetration helped emergence of new segments and players with the favorable demographic advantage. We have seen a splurge of first-time users lead to massive valuation jump in the whole eco-system. Companies that were fighting for survival 2 years back, ended up becoming unicorns, something absolutely unbelievable has happened. The biggest surprise for me is loss-making internet-run companies raising sizable public money.
The question now is, will it continue in 2022? If the answer is yes, this will continue until the money-making slot machines are on and liquidity bash continues. I strongly believe it's time to differentiate between men and boys. Health Tech, Indian SaaS, and EdTech will remain more exciting opportunities in the future. I will be a bit cautious on the FinTech lending as space with higher regulation and defaults can impact them in a big way, and competition from big banks and NBFC's can hurt their margins and clientele.
Two of the most remarkable stories of 2021 were Nykaa retail e-commerce company which did extremely well on the Indian bourses and exactly opposite to it is a case of Indian EdTech giant Byju in talk to go public in the USA that too via SPAC merger at whopping $45-50 bn market capitalization, who must have thought from the most regulated sector in India which is education.
On a different note...........
The year 2022 is eagerly watched as a year transitioning from pandemic to endemic. According to a recent Bloomberg survey about the biggest market tail-risk in 2022, the top 5 were as follows
We see another year of positive equity returns coupled with a roller coaster ride caused by inflation tapering and new covid variants. Due to new virus strains, the powerful restart of economic activity will be delayed - but not derailed. Central banks in the developed world will raise rates but remain more tolerant of inflation. Welcome to 2022 with new inflationary world. Money-making will not be as easy as was in 2020. The last 3 months of markets have shown extreme volatility and nifty has delivered a negative 2% return, happy to share that our both the funds have shown positive return in the same period.