Happy 2022! I can’t believe that we are in the third year of COVID. This year has greeted all of us with a big bang – an exponentially increasing rate of COVID infections. I am glad that despite negative news all around, people made massive amounts of wealth from mid 2020 and till the tail end of 2021. This is the magical part of bull runs. It doesn’t matter if you are in the fundamentally right place. Even if one is invested in junk assets, they make money. Rather, junk makes more money than the fundamentals in a raging bull market. The party continues till such time the party stops.
This post covers my thoughts on what we saw in the last one year and my guesses for how things may shape up in the near future. As they say – the most difficult thing to do is making predictions about the future. I have been proven horribly wrong multiple times in the past on my predictions and the saving grace was following a process.
Asset Class Updates and Future Outlook
Real Estate
Finally we are seeing this decade long dead asset class springing back to life. Across the country there are new launches by developers and prices of properties have started to inch up month on month. As per Anarock’s 2021 Real Estate Report, “Q4 2021 was by far the best, with housing sales in the top 7 cities attaining a new high of approx. 90,860 units in Q4 2021. This was the highest quarterly sales performance since 2015.”
I believe that this could be a start of some material upswing from here owing to primarily two factors. Low interest rates add to the purchasing power of buyers, pushing the demand. In parallel, increased inflation of raw materials such as Steel, Cements, etc is increasing the inherent cost of construction of new projects. If you see your adjacent new building being marketed at a significantly higher price, it is highly likely that it would have a positive rub off effect on your building too!
So finally we may see green tick on our decade old holdings of properties.
Gold
Gold is an inverse asset class and a super cool hedge against uncertainty / risk. We can go as far as possible in history with the same outcomes > Gold continues to beat inflation and shines even more when there are instances of increased uncertainty. Gold kept on creeping up from $1400 levels in 2018 and touched a record high of $2000 in mid 2020 during COVID induced uncertainty. However, post the world got some hang of COVID, it has again started going into a slumber and is hovering around $1750-$1800 levels. Market pundits are increasingly getting bullish on Gold’s material upside from here.
I don’t know how much Gold may rally from here, but I definitely prefer a minor allocation to Gold to help when the hell is breaking loose. Our dated post on Gold is still pertinent in today’s time > Golden Path of Gold
Fixed Income / Debt
This is one area where I see a very challenging period ahead in 2022 and beyond, both in India and globally. It is also one area which people think they understand very well and is considered as relatively risk free. I consider it one of the most complicated investment products and perhaps the riskiest in 2022. I would recommend a background read here > Investment in Fixed Income or Debt.
With rapid reduction of interest rates world wide, the fixed income investors had a jolly ride. Their bond portfolios enjoyed double digit returns in 2020 and till mid 2021. This is primarily because capital appreciation in value of the bonds has an inverse relationship to the rising / falling rates in an economy. In other words, if the interest rates are reduced by the Central Bank, the bond prices will go up and vice versa. Throughout 2021, there has been a sharp increase in inflation owing to excessive money supply globally and lower interest rates. Rightly, owing to this action, the economies survived the blow of COVID caused lockdowns / disruptions. The time to get back to normalcy is now rapidly coming towards us and 2022 may see multiple countries increasing their interest rates. The UK spearheaded this with a 0.25% increase in the interest rates in Dec 2021. The US FED is already signalling multiple rate increases in 2022 to curb flaring inflation. In advance of such an action, the bond prices will start correcting, in other words causing losses to the bond investors. A positive flip side, the bank fixed deposit holders will get a chance to book / renew their deposits at higher rates.
Equities
And finally the asset class which got the most attention for the last two years is Equity. As it is said for Equities – Equity is an investment asset class for Optimists. We need to believe that the future will be better than today and hence we are invested in Equities. But more often than not, Equities is considered as an area to make quick bucks. Recently India’s leading brokerage house Zerodha’s founder Nithin Kamath reported that less than 1% active traders beat bank FDs. This man would have the best insight as Zerodha hosts over 7 million users. I wonder how come my social media timeline contains only recurring profit making wizards. Perhaps most / all of the 1% lucky guys are coming to my timeline (extreme pun intended). Or they are the honey pot to scam the 99% of the loss making traders. So after a super duper 2020 and 2021, 2022 may see moderations or corrections or even higher upticks. Honestly, I do not know which direction it would go. But I have a few updates to the fundamentals across different geographies :
India – One of the fastest growing economies and flush with reforms. The economic growth forecasts are double digit for next 2 years. If everyone knows it, it is already in the price. No wonder it is also one of the most expensive markets in the world.
China / Taiwan – One of the cheapest markets in the world. China is facing head winds of negative goodwill owing to COVID and proactive cleanup by the Government. On the other hand, Taiwan is facing good tailwinds as it is the Semi Conductor capital of the world. Owing to the valuations and their structural importance globally, this is one area which may pleasantly surprise portfolios towards tail end of 2022 and beyond.
US – After India, US is the next most expensive market in the world. It also commands 50% of the world listed market capitalisation and hence must not be ignored.
You may also want to see the Global market returns for the last decade (Year on Year) and it would be evident that leaders change. Considering I do not possess the Oracle skills of predicting the next leader, I would want my investments to be diversified across major geographies, with tactical tweaks based upon any valuation opportunities. This year that tactical valuation opportunity looks in China & Taiwan.
I would like to end this note wishing you all a safe 2022. May you prosper. If you have kids, may your kids go to physical school and if you like, you may go to a physical work location. May your travel plans be more reliable and certain. May you say good bye to last minute COVID tests. May you start socialising freely and visit your loved ones frequently.