While we all loved Shah Rukh Khan in DDLJ, taking whatever the world threw at him with a devil may care attitude, i still believe that we all need to analyze, plan and execute a strategy. I mean just hoping for a Simran to run up at a train station wasn’t going to deliver a union between them, was it? Not without a conscientious director who is trying to entice the audiences into the hall to line his pockets.
It is hard to predict anything in general, but pointers…. Yes, it is good to consider what may happen so that it helps in planning and executing for any foreseen eventuality.
Markets may trade in the range of 55000-62000. Due to the very sharp run up in past 21 months, markets need to consolidate its gains. Overall, the expectation is that year 2022 will be a year of consolidation and in between, there may be dip to the extent of 20%-25% from peak.
US FED Tightening of its balance sheet
Fresh liquidity injection by US FED will stop in the short term and they intend to start tightening the balance sheet by reducing the existing liquidity in the system. Historically, FED balance sheet size was $800 billion in 2008 going up to $4.5 trillion in Sept, 2017and down to $3.9 trillion in 2019. But post COVID, the FED balance sheet size has reached $9 trillion+. Indications are that FED will reduce balance sheet size by a minimum of $1 trillion to $2 trillion and will bring down the size to $7 trillion. This is basically a negative for equities with high valuation but poor fundamental stocks..
Interest rate hike in US
It is also almost certain now, there is an expectation that interest rate will become 0.75%-1% range from existing 0%-0.25% in US within the year 2022 end.
Interest rate hike by RBI
As of now, RBI is more accommodative, and RBI has taken an initiative to reduce the liquidity in the system. Although hard to predict what the RBI will do, it is safe to presume that an interest rate hike from 4% to 4.50% is on the cards within the year 2022 end.
Indian corporates have deleveraged their balance sheet massively. Now, debt to equity ratio of BSE 500 companies are 0.7X. It is similar like the d/e ratio prevalent on year 2004-2005. It induces the revival of CapEx led economic growth. Our GDP has already reached pre-covid level and growth from here onwards will be above the pre-covid level.
Expectation from Budget
Keep in mind that the budget announcement is something that is expected to prop up the overall strategy. It will mostly be a continuation of the previous budget (hopefully with no surprises), to cheer up the market.
Markets will discount all known risks immediately. Unknown risks are well unknown to everyone.
As of now, the known risks are:
It is expected to be flat in year 2022. However, there may be 15%-20% intermittent dip when the market corrects. This can be considered as an opportunity to add to the portfolio more according to your financial plan and asset allocation towards the long term. Year 2020 & 2021 witnessed massive returns from equity and the same reflected in your portfolio. The same was lumpy in nature which was not there in previous two years of 2018 & 2019. From here onwards, return expectation should be reduced and there may be no returns for year 2022.
We are right now at the bottom of the interest rate cycle and interest rate should inch up from here onwards. In this context, it is better to avoid locking the funds in fixed income for the longer period i.e more than 5 years. It is better to stick to shorter time frame i.e 1 year if you would like to invest in debt (fixed deposit, debt MF, G-Sec, etc)
Investors have to check their financial plan, asset allocation first and then need to decide about profit booking, continuation of SIPs etc. Financial advisors are the best one to guide in such scenario.
Most good advisors prepare a sound long term holistic financial plan for you based on your risk profile, define your financial goals along with you… do an asset allocation (with contingency plans built in) with you. They are in the best objective position to help you navigate the markets.