Sensex, Nifty may not mirror this year’s stellar returns in 2022; watch out for Omicron, inflation | INTERVIEW

India’s economic growth story remains intact as we head into 2022, however, Dalal Street may not repeat its stellar rally in the new year.

Nikhil Kamath
Financial markets are cyclical by nature, as they have always been.

India’s economic growth story remains intact as we head into 2022, however, Dalal Street may not repeat its stellar rally in the new year, said Nikhil Kamath, Co-founder, True Beacon, and Zerodha, in an interview with Kshitij Bhargava of Financial Express Online. Nikhil Kamath further said that in the new year investors should keep an eye on the Omicron variant of Covid-19 as a potential threat to domestic markets along with inflation and interest rate hike by the Reserve Bank of India. Here are the edited excerpts.

1. In the last month of 202, domestic markets corrected nearly 11% from all-time highs, before recovering some losses, what do you think next year holds for equities?

Structurally, the story of the Indian economy is still intact. When it comes to the stock markets, however, I don’t think we will see a repeat of the market-wide rally we’ve seen in 2021. I think investors have to be very selective about what stocks they are picking. There will always be opportunities, but investors have to do their homework to see where these opportunities lie, especially because the market seems overvalued.  There is still a risk of slowdowns because of the Omicron, but the thing with markets is that they have shown how it can rally even during a pandemic so we will have to see how things pan out.

2. We saw several IPOs this year, do you believe the IPO rush will continue in 2022?

2021 has been a favorable year for IPOs with many new-age businesses looking to Dalal Street to raise capital. There has been a lot of talk about valuations, and I still think that the markets especially the ones surrounding new-age companies are overheated. The premium you pay for these companies should justify the long-term growth prospects. 

The liquidity the stock markets have seen this year has been unprecedented. It has become a natural avenue for investors since interest rates don’t even keep pace with inflation. Moreover, 2021 did see a lot of optimism surrounding the market despite the pandemic; It usually takes a little bit of pessimism to balance out the euphoria we’ve witnessed. Covid, interest rates, and market sentiment all have a part to play in how IPOs will be viewed in 2022.

3. Cryptocurrencies have been gaining traction and we are expecting to see some sort of regulation come on that front. Do you think Cryptos as an asset class will continue gaining traction?

Personally, I see a lot of activity in this space purely based on ‘fear of missing out’. Blockchain as a technology has a lot of scope regarding how transactions are processed and recorded. But Cryptocurrencies have to be regulated especially considering the volatility of this asset class. While I don’t see any value in banning it, the government must ensure that crypto market is smartly regulated, and innocent investors don’t burn their hands trying to make quick money. In several countries, as well the RBI is planning to introduce a Central Bank Digital Currency. Moreover, the Indian Cryptocurrency Bill will also play a critical role in shaping the crypto space in India.

4. What advice would you give to young investors who have seen their first serious market fall recently, as they head in 2022

Financial markets are cyclical by nature, as they have always been. It is time to be prudent today to exercise a little bit of caution and get some diversification in place. Diversify across different asset classes. And until and unless you have the bandwidth/inclination to invest by yourself, it would make more sense to invest through managed funds.

For young investors – you have age on your side, so you’re allowed to have a larger risk appetite. You can be invested more heavily in stocks rather than fixed-income products. And if you do invest in fixed income products make sure you maximize on PPFs/EPFs etc. Lastly, don’t let FOMO guide your investment decisions – always do your own research.

5. What do you believe will drive equity markets in 2022?

Omicron is something we cannot ignore. How the governments decide to handle the situation will also cast its shadow on the market. As of now, it seems like the virus is not as deadly, but it spreads faster so I think the curbs and precautions governments take will have an impact on the market as well. Hopefully, in 2022 we see the beginning of the end of this pandemic.

Another factor we need to consider is inflation. We’ve seen commodities prices coming down so that’s a bit of a relief, but we also need to be watchful about global inflationary pressures and its impact on our economy. We may see some correction in the markets if the interest rates rise. And some amount of inflation may be expected but it could be a cause of concern if it starts shooting up.

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