Bottom-up approach key requisite to make money from stock market in 2022

Never have we seen such a sharp divergence between the economic situation and asset pricing. Most of the earlier shocks were financial in nature, periods which led to corrections and recovery. This time around, it was health/medical in nature, and the world responded in a manner in which it has been doing in any crisis after the Global Financial Crisis — by providing liquidity/easy money. Hence, after a brief albeit sharp fall, global asset prices (across all categories) have been on the up. While we are not complaining, it is interesting to attempt to find out what lies in store.

From an economic standpoint, the chief risk is high inflation and the ensuing rise in interest rates, moving away from an easy liquidity environment. The global debate on inflation being transitory or persistent is still not settled, and one can keep debating the same till the cows come home. However, increasing interest rates as well as tapering and tighter monetary policies should make all emerging markets, including India, jittery. Specifically from an India viewpoint , while not immune to global environments, some things stand out — i) we are still a partially convertible capital account country and, hence, little less impacted from global shocks, ii) domestic sectors such as real estate and industrials/manufacturing/capex-heavy sectors, which were hitherto in a slumber mode in the last decade, are seemingly developing legs and iii) the China+1 strategy, if it manifests further, should help countries like India, and some Southeast Asian nations as well.

With the kind of returns seen from the markets in the recent past, it would be pertinent to tone down return expectations in the near to medium term. From a top-down market, a bottom-up approach would be the key requisite and right stock/asset selection and allocation would be a critical differentiator. Pace of return and normalcy to growth are important indicators to monitor, though high-frequency indicators are improving and there is an uptick in contact-based services and urban consumption. Rural consumption, it appears, is yet to recover fully.

The recent emergence of Omicron is a concern. However, it is premature to assess its impact (transmissibility, severity and effectiveness of vaccines), though after initial hiccups the world seems to be factoring in less disruptions than before. One must believe the virus is here to stay and the best-case scenario is that it turns from a pandemic to a less virulent endemic and life goes on as usual.

While the economy can be discussed and debated, in terms of the future, one should be cognizant of the changes that are taking place. I believe the pace of change in the last few decades has been phenomenal and we have adapted to it well. However, the pace of change could be even higher in the coming years. We are seeing so many new, and some not so new, concepts such as metaverse, blockchain, cryptos, NFT, artificial intelligence, machine learning, climate change — the list is growing. Whether all or any of these become pervasive or not, one thing is for sure: we need to be cognizant and nimble enough to embrace large-scale changes. Having the ability to adapt to them would be the key differentiator between superiority and mediocrity.

To exemplify in the investment world, paper issuance of new-age companies with emerging business models are happening with vigour. Looking at them through traditional lenses would render them un-investible. Nonetheless, the sheer size of them makes it difficult to ignore them. This is just one of the dilemmas being faced due to a fast-changing environment. I would like to end with a quote by Dr Wayne Dyer, “Change the way you look at things and the things you look at change.”


(The author, Ajit Menon, is CEO of PGIM India Mutual Fund. Views are his own.)