Retail equity investors should stick to quality
NEW DELHI: For retail investors, who stormed the equity market in 2021, 2022 is unlikely to be a period of abnormal returns. Even as the market started the new calendar year on a positive note with Sensex and Nifty gaining nearly 3.5% during the first two weeks, there are enough factors to signal that 2022 won’t be anything like 2021.
The year 2022 is likely to be highly volatile unlike 2021, with central banks globally likely to raise interest rates, negatively impacting equity markets. In India too, RBI will raise rates. However, exuberant retail participation and domestic institutional investors (DIIs) flush with funds will be supportive of markets.
Indian markets gained exponentially in the past two years. While benchmark indices Sensex and Nifty gained over 20% in 2021 alone, there are numerous stocks that surged between 100-300% last year. A major reason that led to this bull run was the unending appetite of newly joined investors.Helped by discount brokerages that made investment in equities an easy affair, this class of investors became a dominant force by their sheer size.
According to data on NSDL and CSDL, a record 27.44 million new demat accounts were created from January to November 2021. Retail investors also invested en masse in equities through Mutual funds with monthly SIPs in December crossing Rs 11,300 crore. Total assets invested through SIP at the end of December was Rs 5.65 lakh crore, most of which goes into equity funds.However, 2022 could be a year of moderation and less exuberance in the equity market. Therefore, investors need a recalibration of their expectations as also their equity strategy.
Focus on quality
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, says that retail investors have been chasing mid-and small-cap stocks, many of them of inferior quality. “This is a risky and potentially loss-making investment style. Retail investors should invest in high quality stocks in segments with good earnings visibility. After the spectacular Nifty returns of the last 2 years - 15% in 2020 and 24% in 2021- markets are richly valued and, therefore, it would be realistic to expect only modest returns in 2022,” he said.
According to Vijayakumar, low double-digit returns would be decent in 2022 and retail investors will have to adjust to reasonable returns, going forward.Deepak Jasani, Head of retail research, HDFC Securities, says that retail investors who have entered the markets recently would be sitting on profits unless they were foolish enough to squander money on ill-advised trading. “They should take some profits and raise cash so that it can be deployed in the ensuing correction. Also, they should restrict their expectations of returns in 2022 compared to 2021.”
He too says that quality of stocks should be the focus and says that midcaps, smallcaps remain attractive for retail investors due to the possibility of gaining alpha they provide in a trending market. “However, the new breed of investors has to learn from the mistakes made by investors in the past and not get carried away at market highs based on just peer valuations or expected value unlocking,” added Jasani.
Where to Invest?
With most sectoral indexes already at record high levels, is there any growth opportunity available for retail investors? Santosh Meena, Head of Research, Swastika Investmart says that they are very bullish on the domestic economy facing sectors like Real estate, Power & Infra, Capital goods, and Financials.
“If I talk about the real estate sector then there is a turnaround story after 10 years of underperformance where the last 5 years were very painful due to demonetization, NBFC crisis, RERA, etc but things are looking very bright now and thanks to low-interest rates, stamp duty cuts, supportive government policies and consolidation in the industry due to RERA,” says Meena.
He added: “Similarly, power, infra, and capital goods sectors are coming out of 14 years of tough periods and there is valuation comfort and a strong growth outlook as well.”Meena adds the telecom sector is looking in a sweet spot where ARPUs have bottomed out, rather we should say they are on an upward trajectory and the worst is behind us, whereas there are multiple tailwinds to support growth.
Experts also ask investors to be wary of digital companies which started going public last year at pricey valuations. Paytm, which launched India’s biggest IPO in November last year, is one of the biggest wealth guzzlers of recent times as its share price has fallen by 50% against the issue price.