The year after the great bounce-back carries expectations. At times, it becomes a burden too. Over the past 12 months, even an index fund delivered near 40% return. Last year, we quoted a Morgan Stanley report that predicted the BSE Sensex to be at 51000 at the end of December 2021. The index has far exceeded that expectation. If you invested in diversified equity thematic and sectoral funds, you could have possibly even doubled your money. Directly buying shares was even more rewarding to many. Share prices of some companies have jumped multi-fold in just a year.
That puts a lot of pressure on the year ahead. Anyone investing regularly in the stock market would know that a repeat performance is not easy. Many expectations have to be met for stock markets to generate a higher return over the next couple of years.
As we already say in this column, today’s share prices function of tomorrow’s profits. With share prices trading at record-high levels, the earnings for the next two years are already in the current price. For any further movement, markets need to see that businesses are likely to do even better in the years ahead. Analysts tracking sectors would wait for the two quarters of the next financial year before predicting future profits.
Curve ahead
While there is a prediction of a steady profit path for major listed companies in the year ahead, a real risk to financial markets is inflation. We know that persistently high inflation keeps interest rates firm. That has a further impact on the borrowing by businesses for expansion. As significant economies look to adjust to a new world post the Covid-19 pandemic, any change of direction by the United States in the stated low-interest-rate policy could trigger a global selloff.
For India, the recovery is just about the beginning. The year ahead is way too crucial for sustaining growth and creating economic expansion. In a speech last week, the RBI governor Shaktikanta Das explained the economic recovery scenario. Demand driven by private consumption is the most significant contributor to the economic growth in India. You need people to earn well and spend money.
He pointed out that the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act or MNREGA remains higher than the pre-Covid levels. That means people are still in their villages looking for a job and unable to get back to their employment in cities and towns. “Daily wage earners and workers at the lower rungs of the society have incurred significant losses of income and employment during the pandemic that will take time to repair,” he said. He added that small businesses have also been hit harder and would require support to recover and achieve their full employment potential.
The speech sums up the state of the economy. It is amply clear that even if corporate profits stay on course next year, the demand driven by private consumption will continue to find feet in 2022. That means businesses may take their time to expand capacity.
Your money in 2022
Inflation is the most significant risk for your money in 2022. A persistently high consumer price inflation would mean borrowing rates set by RBI now will stay where they are if not go up immediately. If the US decides to hike interest rates, that may not lead to interest rates rising in India immediately. However, the action would hurt the capital flows into equity and debt markets worldwide. When US interest rates go up, global institutional investors prefer assets denominated in the US dollar than in any other currency.
Although India may do well in government finances, checking inflation, rapid disinvestment, foreign investors may go slow or pull out money. That may just turn out to be a blessing in disguise for Indian investors who are looking to get going with their investment. A year ago, this column suggested hiring a professional advisor. If you have done it, work with your advisor as a team. If you have not done it yet, it is time to get going with it. There is enough excitement in the market in the year ahead.
(The author is editor and publisher at www.moneyminute.in)