We review the year gone by - CY21 and present our outlook for CY22 for Indian equities

1. “Survival and Sustainability”
Investment Outlook & Strategy for 2022
The man who never had to toil
To gain and farm his patch of soil,
Who never had to win his share
Of sun and sky and light and air,
Never became a manly man
But lived and died as he began.
-- from ‘Good Timber’ by Douglas Malloch
For Private Circulation only. Please refer to important disclosures at the end. (23 December 2021)

2. Key message
• 2022 may be continuation of 2021 but may bring different outcome for investors
• Central bankers may not support markets like they did in 2021
• Many aberration may become acceptable as normal
• Survival and Sustainability may continue be dominant themes
• Moderate return expectations will make life simpler for investors
• Shape of New World Order may continue to be hazy

3. Aberration becoming normal
• Distance working becomes normal
• ESG, an elite business practice till couple of years ago is now a normal investing
requisite.
• Electric mobility, a distant possibility five years ago, is fast becoming standard
• Lower economic curve – growth, rates, inflation, population growth, etc., becoming
normal
• Elevated PE ratio gaining acceptance as normal
• Hyper nationalism no longer equated with fascism.
• Invasion of individual privacy by regulators becoming norm
• Events like Evergrande default no longer considered black swan (like Lehman was)
• Global narrative changing from “post Covid world” to “living with Covid”

4. 2022 may be nothing like 2021
• Central Bankers may not support markets like they did in 2021
• “V” shape economic recovery of 2021 may plateau
• Key drivers of 2021 earnings may take a back seat, while new drivers
may not be in place during 1H2022
• Market returns in 2022 may not match the returns of 2021
• Abundant liquidity may begin to dry up
• IPO frenzy may moderate

5. …or it may be more like 2021
• Survival (living with Covid) may remain a key theme
• Covid protocols becoming intransient in governance, business,
and social practices
• Sustainability may remain a key theme with greater emphasis on
• Climate change and ESG; and
• Normalization of ultra-loose monetary policies and profligate fiscal
policies

6. Investment Landscape
2022: India
 No significant macro improvement over 2021 likely. Real GDP growth to average around ~8%
 3/4th population may continue to face stagflation – low to negative wage growth & rising cost of living
 Market volatility to rise in first half of the year; second half might see gradual up move
 Overall equities may give 10 + 2% return
 Next RBI move may be a hike. Lending and deposit rates to rise gradually
 Liquidity conditions to tighten; may remain surplus though.
 No significant acceleration in Private capex; public capex to remain strong
 Fiscal conditions to remain comfortable; current account deficit may rise. INR to stay under pressure
2022: World
 Growth to decelerate; inflation to ease in 2H2022
 Volatility to increase
 Monetary policy to tighten; though Omicron may slow the pace of tightening
 Emerging economies may come in favor in 2H2022 due to USD weakness.
 Industrial metals and oil to come under pressure on growth faltering
 Digital currencies to gain more prominence in global monetary system; gold to lag

7. Market Outlook
 NIfty may move in a large range of 15200-19200 during 2022. It would be reasonable to
expect 10 + 2% return for the year for diversified portfolios. Focused and thematic
portfolios could return higher yield in 2022.
 The outlook is positive for IT Services, Financial Services, select capital goods,
healthcare and consumer staples, and negative for commodities, chemicals, energy and
discretionary consumption. For most other sectors the outlook is neutral.
 Benchmark bond yields may average 6.5% +/- 30bps for the year. Shorter end yields may
do better in 1H2022, while longer duration may do better in 2H2022.
 USDINR may average close to INR75-76/USD and move in 73-80/USD range on negative
current account. Higher yields may though attract flows to support INR.
 Residential real estate prices may show a divergent trend in various geographies, but
may generally remain stable. Commercial real estate may remain best category.

8. Investments - Strategy
• Keep it simple – Maintain standard allocation’ avoid trading and
moderate return expectations.
• Focused portfolios; market cap agnostic
• Asset allocation: Equity 60%; Debt 30% and Cash 10%
• Equities: Overweight IT Services, Financial Services, select capital
goods, healthcare and consumer staples; Underweight commodities;
chemicals, discretionary consumption; energy
• Debt: 1H2022 50% accrual; 50% ultra short duration. 2H2020 75%
accrual; 25% short duration.

9. Macro Outlook
• Inflation: The consumer inflation may average around 6%. WPI may however ease as the raw material
correct and wage hikes subside.
• Fiscal Deficit: The fiscal situation may remain comfortable as the tax collections remains steady and
aggressive disinvestment targets are met. No major tax/duty concessions are expected.
• Rates: Benchmark yields may average in 6.5% +/- 30bps range. Next move of RBI may be a hike in
policy rates. Deposit and lending rates may rise as liquidity normalizes and credit demand begins to rise.
• Current Account: Current account balance to stay negative for most part of the year as import growth
continues to outpace exports. The deficit may average around 1.75% to 2.25% for 2022.
• Savings: Household saving may grow at even slower pace as real wage growth remains poor. Aggregate
corporate savings though may be higher due to continued deleveraging and rise in free cash flows.
• Investment: The government investment expenditure may pick up. Private capex is unlikely to see any
meaningful recovery in 2022.
• Exchange Rate: USDINR may average close to INR75-76/USD and move in 73-80/USD range on
negative current account. Higher yields may though attract flows to support INR.
• Growth: The real GDP growth for 2022 may average around 8% as the low base effect begins to wane.

10. Key Monitorable
• Impact of normalization of monetary policy on prices, flows, currencies and growth etc.
• Impact of Omicron and subsequent variants of Corona on global and Indian economy
• Normalization of global supply chains, especially semi conductors and port congestion
• Geopolitical flashpoints – Ukraine, Afghanistan, Taiwan
• Challenges to the supremacy of USD over global monetary system
• Pace of redundancy of conventional fuels
• Widening of global digital divide
• Weather patterns and impact on food supply & prices

11. Trends to watch
• Disintermediation in retail trade
• Stress in consumer credit (including micro credit)
• Consolidation in financial services
• Wage inflation
• Export growth
• Normalization of global supply chain
• Policy response to cryptocurrencies
• Credit demand growth
• Demand growth for conventional fuels
• System liquidity

12. Key risks
• Worsening of Omicron spread and emergence of more virulent variants of the Corona
virus; leading to widespread mobility restrictions.
• Worsening of Sino-US trade relations.
• Chinese administration allowing some large stressed institutions to default on their
international obligations.
• Hike in effective taxation rate in India to augment revenue.
• Material escalation on northern borders.
• Civil unrest in more parts of India.
• Stagflation engulfing the entire economy, as inflation stays elevated and growth fails
to meet the expectations.
• More exits from EU.
• Severe weather conditions.
• Sharp rise in credit cost for lenders.

13. Growth Outlook
FY21 and FY22 normalized

14. Growth Outlook
Global growth to plateau and slide lower

15. Growth Outlook
India to remain fastest growing economy amongst peers

16. Growth Outlook
Taper impact – India’s external position comfortable to tolerate

17. Growth Outlook
Government capex to continue driving investments

18. Growth Outlook
…as fiscal conditions continue to remain comfortable

19. Growth Outlook
Inflation elevated, but expected to cool down in 2H2022

20. Growth Outlook
Monetary policy normalization in 2022

21. Earnings Outlook

22. Earnings Outlook
As share of corporate profit in GDP rises

23. Earnings Outlook
Business confidence is high and stronger solvency ratios have improved

24. Earnings Outlook
…and balance sheets are deleveraged across segments

25. 2022: Earnings Outlook
Though consensus may be little optimistic, the new profit cycle looks plausible

26. Equity Market Outlook
For long term investors 2021 Nifty performance best since 2013, may moderate in 2022

27. Nifty Outlook
Nifty may end 2022 with decent gains of 10 + 2%

28. Investment Strategy
• Maintain standard allocation’ avoid trading and moderate return expectations.
• Focused portfolios; market cap agnostic
• Asset allocation: Equity 60%; Debt 30% and Cash 10%
• Equities: Overweight IT Services, Financial Services, select capital goods, healthcare and consumer staples;
Underweight commodities; chemicals, discretionary consumption; energy
• Debt: 1H2022 50% accrual; 50% ultra short duration. 2H2020 75% accrual; 25% short duration

29. 2021 in retrospect
 Most of us felt the agony and helplessness as deadly delta wave of Covid-19 hit India.
 Science and Technology response was remarkable.
 Policy response was quick and effective
 Common household investors stormed equity and crypto markets
 Global supply chains faced massive challenges, impacting supply of coal to chips
 Geopolitics – Afghanistan was added to the list of hot flashpoints (Ukraine, Taiwan, etc.)
 Pandemic caused the global inequalities to rise sharply
 Cheap money fueled asset prices

30. 2021 in retrospect
Indian equity markets in 2020
 Indian equity returns during 2021 were amongst the top performing major emerging
markets and in line with the best performing developed markets
 The equity rally was broad based with small cap stocks outperforming the benchmark by
over 150%.
 Alpha strategy worked best for the investment managers.
 Cyclical (metal & Realty) and IT Services were the top performing sectors, while consumers
(Auto, FMCG) and Pharma were the worst performers.
 Some stressed companies were top performers raising doubts over sustainability of gains

31. 2021 in retrospect
All Nifty gains came in 3 months

32. 2021 in retrospect
Market breadth negative for 7 out of 12 months

33. 2021 in retrospect
… Broader Markets outperformed majorly

34. 2021 in retrospect
Cyclical (Metal & Realty) and IT top performers’; Consumer & Pharma lag

35. 2021 in retrospect
Some stressed companies in list of top gainers

36. 2021 in retrospect
Net Institutional flows erratic; net flows marginally negative

37. 2021 in retrospect
Small cap funds top the chart, Gold & International Funds lag

38. 2021 in retrospect

39. 2021 in retrospect
Yield curve stayed steep

40. 2021 in retrospect
INR lost some ground to USD, but remains overvalued overall

41. 2021 in retrospect

42. 2021 in retrospect
A year of strong capital raising

43. 2021 in retrospect
Global Corona Dashboard (December 21, 2021)