Asset class review: Risky assets continue their dominance, energy, realty assets come out of a rut

In the base metals pack, most counters gave strong returns by rising up to 45 per cent. Among agri commodities, cotton was a standout winner due to increased international demand for the crop. Bullion counters ended with cuts.

Equities continued their stellar run from last year, though underperformance of the banking sector and some selling at the end pared some of those gains. Mutual fund returns were also strong.

Bitcoin: Continues its run
Bitcoin was the asset to hold during 2020 as the cryptocurrency surged nearly 300 per cent in the year. The rally stretched to 2021 as well, more than doubling to hit an all-time high of $68,790 on November 10. However, profit booking since then has trimmed the gains. It has corrected more than 33 per cent from its peak. Market analysts say the numero uno digital token is bound for consolidation and corrections after a long rally.

Jay Hao, CEO of OKEx.com, says the year-end volatility in Bitcoin is expected as we see a lot of institutional and retail sell-offs in the crypto market globally. Other market experts argue that the lack of clarity over the fundamentals and use cases, along with widespread buzz over regulations and legitimacy, is hurting the sentiments.

Precious metals: Lacklustre
After rallying 30 per cent in 2020, gold’s glitters could not last in 2021. This was largely due to a strong US dollar, which historically has an inverse relationship with bullion, and fading safe-haven appeal, as the outlook for the global economy improved. However, the inflationary phase did not prove to be “transitory”, as was expected by central banks globally. Silver, too, took a hit in the year amid increased volatility in industrial metals.

Analysts are moderately positive on the two precious metal counters for 2022 and a few analysts say these can still deliver a double-digit return.

“After the modest losses in 2021, gold faces an equally challenging year in 2022 as the Fed and other central banks fasten the monetary tightening process to control rising prices. However, at the same time, rising inflationary pressure and signs of volatility in equity markets may increase gold’s appeal,” says Ravindra V Rao, VP-Head for Commodity Research at Kotak Securities.

Base metals: Demand continues
Demand for metal commodities continued to remain for the better part of the year, pushing prices higher. Prices cooled off in the later months of the year. Despite that, they gave investors enough reasons to cheer.

On the back of a recovery in demand, copper surged 25 per cent, nickel 28 per cent, zinc 32 per cent and aluminium 42 per cent. Lead shrugged off its underperformance last year, rising just 20 per cent.

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“Higher commodity prices, following supply-related concerns and stronger dollar index, led to an uptick in inflation. From agro to metals to soft commodities, everything moved up in 2021. Supply constraints of these commodities were led by Covid restriction that most countries levied, and how and when these restrictions will be lifted is nobody’s call as of now,” says Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal.

Currency: Rupee depreciates
The rupee in 2021 consolidated in a broad range of 72.50 and 75 against the US dollar. But just before the year-end, it surpassed the barrier and hit a high of 76.50 per dollar. Intervention by the Reserve Bank of India (RBI) is suspected to have kept the volatility in control and led to stabilisation of the currency.

“The recent move in the dollar suggests that the range has shifted higher and further lows could be bought in, and all the above factors mentioned will be important to determine the trend for the rupee. We expect the USDINR pair to trade with a positive bias and with the range of 73.50 and 77.50,” says Somaiya.

Energy: Rapid rebound
After a forgettable 2020 for the most traded and perhaps the most important energy commodity, crude oil delivered stellar returns in 2021. Brent crude oil prices jumped 62 per cent, while natural gas jumped 71 per cent.

The prices shot up as demand increased from economies that reopened during the year. A cut in production by OPEC+ countries and a supply squeeze also helped to raise the prices.

“The situation with oil futures right now is such that funds may be about to start buying again. It will all depend on Omicron and possible lockdowns. Risk of more infections is high and, therefore, the trend remains on the downside for WTI prices to touch levels of $66-67 levels in coming weeks,” says Navneet Damani, Vice-President-Commodity & Currency Research, Motilal Oswal.

Real estate: A year of reckoning
Demand for residential properties surged during the year, ending a multi-year lull as low interests on home loans increased the demand. Investors in these properties also generated decent returns. The year 2021 saw a recovery from the pandemic turbulence, a remarkable improvement in sales volume and a stable to marginal increase in price dynamics. This was also reflected in the shares of real estate companies. The Nifty Realty emerged at the second best sector in the year.

Rajani Sinha, Chief Economist and National Director at Knight Frank India, says residential property investors secured rental yield of around 2 per cent per annum and capital appreciation in the range of 0-5 per cent across the top 8 cities.

Demand for warehouses also remained high and office spaces also saw demand as the pandemic ebbed. “In case of commercial office space, investment in high quality assets would have yielded rental yield of 7-8 per cent per annum. In terms of capital values, investors would have witnessed a decline in the initial part of the year during the Covid second wave and stability later on as office demand improved during the last quarter of the year,” Sinha says.

Equity: Massive crash then a record run
For equities, the bumper returns continued for another year, though a late profit booking due to the third wave of the virus and rising inflation meant gains tapered. Nonetheless, 2021 was rewarding in a big way for equity investors. The 30-share benchmark Sensex soared past the momentous 50,000 and 60,000 levels this year, after the pandemic-triggered crash in March 2020.

With concerns over rich valuations easing a bit, the Street is fairly positive on 2022 returns. Some brokerages are projecting a Sensex target of 72,000 and a corresponding Nifty target of 21,000. The bullish targets suggest 23-26 per cent potential upside for the market indices in calendar year 2022.

In a survey done by ETMarkets, the most bullish analyst was Amar Ambani, Senior President and Head-Institutional Equities at YES Securities. He has forecast Sensex at 72,000 and Nifty 21,000. The lowest targets were spelled out by Vinod Nair, Head of Research at Geojit Financial Services. He saw Sensex at 58,800 and Nifty at 17,500, respectively.

Mutual funds: Thematic schemes lead
As equities were booming, most mutual fund schemes gave good returns in 2021, with some of them returning up to 90 per cent year-to-date. The top five funds of the year were Quant Small Cap Fund, Quant Infrastructure Fund, L&T Emerging Businesses Fund, Principal Small Cap Fund and ICICI Prudential Technology — a mix of smallcap and sectoral funds — delivering 76-90 per cent returns.

In the debt fund category, credit risk and high risk funds shone in a low interest rate environment. UTI Credit Risk Fund, Baroda Credit Risk Fund Plan B, Nippon India Strategic Debt Fund, IDBI Credit Risk Fund and Franklin India Low Duration were the top five performing debt funds, delivering 17-23 per cent.