2022: A year of opaque investment returns

Indian stocks: an exception

Indian stocks have been different this year, with benchmark indexes Nifty and Sensex delivering positive returns, compared with their counterparts’ double-digit declines across many global markets. This is despite global headwinds such as high inflation, rising interest rates, currency volatility and geopolitical uncertainty.

Graphics: Mint

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Graphics: Mint

“The driving force behind India’s outperformance was increased capital spending by the central government, which has lifted the Indian economy out of the Covid-19 recession and led to strong consumer demand. strong. “The combination of these factors has resulted in strong corporate earnings growth of 24% CAGR over 2020-22,” said Hemang Jani, head of equity strategy at Motilal Oswal Financial Services. “.

Having said that, the mid- and small-cap segments are not immune to the broader market sell-off. VK Vijayakumar, chief investment strategist at Geojit Financial Services, said that despite the correction, they are still trading at a premium compared to large-cap companies.

For the US market, Indian retail investors’ favorite destination for international diversification, said Pableen Bajpai, founder of FinFix and Analytics Pvt. Ltd, said, “This turbulent period presents good buying opportunities. Sadly, as investors, we’ve fallen into biases lately and overlooked what didn’t look good at a time. Investing outside of the domestic market is a good strategy because it gives a different flavor to stocks and sectors, besides diversifying currencies. However, it can only work if one understands the non-linear investment path and is patient during such difficult times.”

While equity is expected to see higher volatility over the next few months, it is an important asset class that can beat inflation in the long term, according to experts.

Debt: higher volatility

The year saw the fastest rate hikes by central banks worldwide. As a result, yields on debt instruments spiked. An increase in yields impacts returns on debt instruments as bond prices fall as yields rise.

Longer-term government bonds (which most long-term funds and/or gold funds invest in) have been hit the hardest this year. Although the magnitude of the yield spike is higher in the case of liquid instruments such as Treasury bills, the impact is minimal due to the much lower maturity of liquid or low-maturity funds. According to Pankaj Pathak, fixed-income fund manager at Quantum AMC, the probability of a bond’s market value going down has dropped significantly as the rate hike cycle in the country draws to a close.

When investing in debt funds, it is important to match the duration of the investment with the maturity of the fund’s portfolio to reduce the impact of volatility. Joydeep Sen, an independent debt market analyst, says people are better off investing in funds with moderate maturities such as corporate and bank bonds and PSU funds with maturities of around 3-5 years. . He also said target maturity funds – open-ended index funds that passively invest in government securities and PSUs – with the right maturity are a good choice if the investments can be held to maturity. term.

Gold: supported by the fall of the rupee

By 2022, gold’s reputation as a hedge against inflation has been put to the test. While the yellow metal is the top performer of all conventional asset classes with a 12% return in rupee terms, the performance is negative in dollar terms. The difference between Indian and dollar returns can be attributed to the devaluation of the rupee against the dollar.

Siddharth Vora, head of investment strategy and fund management – ​​PMS, Prabhudas Lilladher, said: “While geopolitical tensions in the first half of the year and the crypto crisis in the second half have increased strength, attractiveness of gold during the year, rising interest rates have put the gold price under pressure.” “We expect gold to add value to our portfolio by providing diversification amid increased volatility and easing demand for risk assets. From an asset allocation perspective assets, gold reduces portfolio volatility as it has a low correlation with other risky assets,” added Vora.

Real estate: patchy profits

As various reports show, the Indian residential real estate space sees good demand in 2022 due to various reasons such as low interest rates and developer discounts. But the growing interest in the space has not reflected in the property’s appreciation of the value. According to the RBI’s housing price index, house prices will increase by only 1.4% in 2022.

Anuj Puri, Chairman of ANAROCK Group, said, “Price increases by 3-5% in most urban areas. Tier 2 and Tier 3 cities like Ahmedabad and Lucknow have seen increased homebuying sentiment and unleashed their potential as future growth drivers of the Indian property market. However, any further repo rate hike could weigh on demand, especially in the affordable housing segment, which is particularly price-sensitive,” added Mr Puri.

Real estate investment trusts (Reits), which invest in commercial properties in India, support portfolio diversification and have also gained traction.

Asset allocation: holy grail

Asset allocation is a time-tested method of preventing losses in any market scenario as it balances the risk and reward aspects of a portfolio.

According to Nitin Shanbhag, head of investment products, Motilal Oswal Private Wealth, “asset allocation should always be based on investors’ risk profiles, regardless of their age. For example, an elderly citizen may continue to maintain a positive risk profile (higher equity allocation), while a new investor entering the market may adopt a risk profile. cautious to begin with.”

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