Unprecedented participation in retail combined with cheap money to drive most markets to all-time highs in 2021. The strength of the parent market, the United States, provides resistance to other developed markets and emerging markets such as India. The engagement of large retailers is a completely new development that has made forecasting the market very complex.
Two pieces of information that shed light on unprecedented retail overselling and its impact on markets will help us put the issue in perspective. In 2021 alone, American investors downloaded 15 million business apps and invested $ 1 trillion in stocks. This investment is higher than the accumulated investment made during the last twenty years. US retail investors now own 12 times more shares than hedge fund shares. Cheap money provides a convenient context for investing / trading stocks.
This explosion of retail engagement is a global phenomenon triggered by the pandemic. In emerging markets, this trend is evident in India. Retail participation is desirable but the concern is about exuberance and total disregard for valuations.
An important lesson from the history of the stock market is that a sharp decline is often followed by a strong recovery. The stock market often overreacts - both up and down. During a bull market euphoria, valuations reach unsustainable levels, resulting in a sharp correction. Panic during a dip moves the valuation very low, which in turn leads to buying, which leads to a recovery. This pattern repeats. This has implications for investors.
Let's take a look at the history of recent market crashes and recovery from crashes. During the 1998-2000 tech bubble, valuations reached unsustainable levels, resulting in a massive 49 percent drop from the 2000 peak. The market held for a while, then a strong 140 percent recovery. in 9 months during 2003-2004. One of the worst drops in the history of the stock market occurred in 2008 during the global financial crisis. The collapse was massive at 65 percent. Then, from the lows of March 2009, there was an impressive 180 percent recovery in 15 months. The 40 percent collapse in the wake of the March 2020 pandemic was rapid and massive. This was followed by a strong recovery of 135 percent in 18 months.
What is the lesson from this trend? Stock market returns are frequent. There will be periods of euphoric rally, strong corrections and consolidation. You don't make a lot of money by buying at the peak of a bull market, but by investing regularly and patiently through a bear market. Most importantly, superior returns are generated through a simple investment strategy: investing in high-quality stocks that consistently generate superior cash flows. A smart investment strategy is like running a marathon. It is not like running. Market timing is impossible. Spending time in the market is more important.
The race that followed the March 2020 crash appears to be over. This sprint, which took Nifty from 7,511 in March 2020 to 18,604 in October 2021, produced a 135 percent return in 19 months. This one-way rally ended with a correction above 10 percent of the peak. Unsustainable valuations and incessant selling (the foreign institutional investor) have now crowned the bright side.
Returns in 2022 are likely to be moderate. Therefore, the focus of investors should be twofold: first, look for sectors and stocks that can generate returns that exceed the market, and second, invest patiently for the long term. New virus variables and rising interest rates may present challenges in 2022. Market corrections resulting from these challenges may turn into buying opportunities.
In 2022, the outlook for the information technology, finance and construction sectors are good. Financial statement valuations, especially those of major banks, are attractive thanks to continued sales from the Food Industry Division. Information technology is in a multi-year development cycle as a result of accelerating digitization. TI ratings are high, but earnings visibility is very good. Low interest rates are driving a boom in the construction sector, which should benefit all construction-related stocks. Focusing on high-quality stocks in these sectors can lead to returns that will outperform the market in 2022. Invest in mid- and small-cap companies through mutual funds (systematic investment plans).
As an extreme precaution, book some earnings and move some money into fixed income. Investing in gold ETFs would also be a good way to hedge against rising inflation and depreciation of the rupee. Look beyond 2022 and invest patiently for the long term. Connect with SIP. The race that lifted the Nifty 135% from its March lows is over. Now the marathon begins.
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