Decade In A Quarter!! – A Prespective of Quarter 1, 2022

““There are decades where nothing happens; and there are weeks where decades happen”–Vladimir Ilyich Lenin

Key Events

The first quarter of 2022 played out exactly like above packed with multiple historical events!

• Record selling of Indian shares by Foreign Institutional Investor (FII) Selling – FIIs have had a huge influence on the Indian markets through their purchases over the last 3 decades or so. When they sell continuously for 4-5 months (since October 2021) for more than USD14.6 Billion, you naturally tend to feel nervous. We have seen an outflow of money from all the Emerging Markets including India towards safe haven assets like US Treasury Bonds. In the past, (e.g., 2008) such heavy FII selling, would have led to a deep crash in the Indian markets. But, not this time around, thanks to aggressive retail participation in Indian equities through direct stocks and funds. A multi-decadal phenomenon getting re-written in front of our eyes of Indians moving towards Equities. Historically, whoever has bought when FIIs sold, they have made good money in the medium term.
• Russia – Ukraine War and the resulting Western Sanctions – The unfortunate war between Russia and Ukraine has had a big impact on the financial markets. Russia and Ukraine are amongst the largest exporters of agricultural products and commodities including wheat and oil. Major parts of Europe has significant dependence on Russian oil/gas for their needs. The global supply lines are getting impacted, production is cut resulting in higher commodity prices across the board. Coupled with the Sanctions against Russia, the world trade patterns are getting changed dramatically, new and alternate payment mechanisms may evolve in the coming months. Increased commodity prices is definitely a negative for India.
• Monetary tightening by the Central Banks – Western countries are seeing high inflation after 4 decades. Their Central Banks are reacting now after thinking that inflation would go away on its own. They are increasing interest rates, sucking out liquidity from the system etc., A good example is the 30 year US Housing mortgages rates have increased from 2.85% to 4.5% in a matter of 3 months. So far, the growth has remained strong in western countries but will it continue to be so? Will the rising commodity prices and inflation bring in stagflation in western countries? It has already people have started talking about the dreaded “R” word (recession).
• Continuing Covid Lockdowns – We had an Omicron wave this quarter resulting in almost 2- 3 weeks of lockdowns in India. Now that life is back to normal, we may not remember this. While lockdown fatigue has set in, the threat is far from over as the rise in cases in Europe and China this past 2 weeks are showing
• Shocking value erosion in Indian New Age Stocks – We had a stellar 2021 when there was a record IPO collection of 1.2 lakh crores in the Indian markets from more than 60 IPOs. Many tech companies which were raising money in private markets for almost a decade decided to hit the public markets and submitted itself to harsh q-o-q performance scrutiny. Not a pleasant quarter for them for sure. Almost all of them, like Paytm, Nykaa, Zomato, Cartrade lost lot of value. Notoriously, PayTM has become the poster boy having lost more than 70% of its IPO price. This has naturally reduced the appetite for such big IPOs in 2022.
• Massive meltdown in Nasdaq and China Tech Markets – The US and Chinese Tech markets have seen steep falls. At one point, the Nasdaq Golden Dragon China Index was down 68% from its peak, while the Nasdaq 100 was down by 21%. Huge amounts of investor wealth lost, with some inflicted by the Chinese government actions and some by market dynamics.  Nobody would believe that after 3 decades of non-stop growth in their economy, the MSCI China Index returns are almost flat over the last 30 years!!

Going through all these major events in a single quarter, what do you think the Indian markets would have done?

It remained flat. Everybody expected a big fall in Indian markets as well but in reality we moved up marginally by 0.8% this quarter!!

How to avoid failure as an Investor?

One of the greatest investors Charlie Munger talks about the mental model of Inversion, where the focus is on what we should do to avoid failure. We would encourage all our investors:

• Avoid The Folly of Forecasting– While it is difficult (and probably unnecessary) to predict short term market movements, this quarter’s market reaction once again reinforces the fact it’s very hard to predict the short term movements. Yes, we did see a 10% dip somewhere in late February and early March, but we have recovered most of the ground. A panic reaction of exiting the markets immediately at the start of the war would have cost the investor a good 10%.
• Not to shun international diversification –The last quarter was bad in the context returns for those who have invested in global equities. Global Equities are meant for diversification in the portfolio and a quarter or two of bad market performance shouldn’t deter from building your global exposure.
• Avoid timing the purchases and sales – There are several investors who have been waiting for years awaiting a market fall. However, when the market fall does happen, they find it very difficult to take action and commit to buying. Let’s ask ourselves honestly how many felt comfortable in the month of February and March 2022 to buy when the Indian markets fell by 10%? Very few. Hence, having a plan to invest and sticking to the plan is essential.

Focus on Asset Allocation, Re-balancing and Liquidity Buffer

As always, we will emphasize that investing is a long-term journey. Your investments in equity, debt, gold and other asset classes should be driven by our long-term asset allocation and liquidity needs. Sticking to asset allocation makes all the difference in the long run. During these turbulent times, it is extremely difficult to have this discipline in the face of so many headlines and contradictory “expert” views.

For most of you, the equity allocation should be for long term goals/wealth creation and debt or debt hybrid funds are for the near/medium term needs. Speak to us to understand your current allocation in equity and how you are positioned in your portfolio. We can together decide if it requires any re-balancing.

Happy Investing!!