Market views for PMS in 2022 and ahead

(Article by Shailendra Kumar, Co-founder & CIO, Narnolia Financial Services Ltd.)

 

2022 is a major reset year for the global monetary regime. For over a decade, central bankers across major economies had been on an expansion spree flushing the financial system with an abundance of liquidity. But strong global economic recovery post-Covid during CY2021, rising inflation, and strong employment and wage growth had provided enough conviction to central bankers to reverse the course. This is a big reset, reversal of a trend that was going on for over a decade and so it becomes the most important factor that will impact the performance of various asset classes across the globe. We have already started witnessing heightened volatility and this will increase as we move through this year. Though policymakers appear confident of a smooth glide path one thing is certain ‘the FED Put’ will not be easily available, unlike previous years.

 

US S&P 500 over the last ten years have given 337% total return. A breakup of this 337% smart rally suggests 71% due to multiple expansion, 106% from earnings growth, 24% from dividends, and a massive 136% due to buybacks. So, almost 40% of the stock performance over the last decade in the US is due to corporate buybacks. In fact, these huge buybacks are an unintended consequence of easy monetary policy as US corporate found it more prudent to buy back their own shares than to put their retained earnings into financial market investments at near zero percent yields. Now as yields start going up in developed economies this trend of higher buyback will surely take a backseat and so one of the key engines that have been driving equity performance in the developed markets like US will lose momentum and that will make Indian equity a global investment asset class slightly more favoured. For sure this story will play over the next couple of years once global investors start seeing this in terms of actual market performance going forward. And there are high probabilities that the same will happen over 2022.

 

Indian equity performance is based on strong structural trends of formalization and digitalization. And these are structural constructs and will have a very minimal impact due to changes in global monetary direction. In fact, during the year there is a high probability of an India positive liquidity event. Indian sovereign bonds stand a high chance of being included in global bond indices this year and that will make multiple macro data point positive for India. This will not only be good for domestic bond yields but also positive for the currency and flows to equity.

 

But this large global re-set will require investors to take a more balanced approach to investing. During the last decade of low growth and high liquidity macro environment has resulted in high premiums to slow-growth but sustainable high-quality businesses. Fundamentally there are three key distinct attributes or axis to a stock- Quality, Growth, and Valuation. Usually during various market phases, one of the axes becomes more popular than others. In slow-moving sideways kind of economic conditions, quality performs far better than growth or valuation.

 

While in a rising economy it is all about buying the next hyper-growth company. And during other period market performance are about identifying valuation anomaly. Going forward, the right way to approach equity investing will be buying quality companies that have higher business growth in the foreseeable 2-3 years and are still trading at a valuation where assuming no multiple expansion still leaves us with a favorable risk-reward scenario. Investors will also have to become comfortable with higher volatility in the outcome.

The last eighteen months have pampered us with near-perfect linear gains which is always an exception, not a rule. Interesting times ahead!