Brace for the terrible 2

Good Morning and wish you a wonderful year ahead! A big hello to readers who signed up this week. This is The Signal’s weekend issue and the first of 2022. We take a look at what is in store for the stock market this year. Also in today’s edition: the best reads from the week. Happy weekend reading.

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As 2022 approached, seasoned investors in shares began to take stock. Benchmark indices, after hitting their peaks in October 2021, had dived by about 10% by December third week.

“We have turned cautious,’’ said a Mumbai-based private portfolio manager who did not wish to be named. “We are gradually shifting to capital preservation mode,” he told The Intersection.  

In mid-2021, many believed that India was just beginning to ride a wave the crest of which was yet far out. Billionaire Rakesh Jhunjhunwala, arguably the most bullish investor in India, said in June that he had “a 2002-2003 feeling”. Morgan Stanley too felt that the rally mirrored “the trend of the one in 2003-08 and may even have more legs”. 

The 2003-2008 period was a golden run for the Indian economy and the stock market. The economy clocked an average annual growth rate of 9% throughout the five years, the best stretch in history. The Bombay Stock Exchange’s (BSE) 30-share index, the Sensex rose from below 3,000 at the beginning of 2003 to over 20,000 in 2008. Before that run, it had rarely happened that the economy and the share indices were in sync. The stock markets have been buffeted by headwinds, even shocks on occasion, in the first couple of years of every decade in the past 40 years. Here is a look at what might be in store for the fifth decade. But first, here’s a quick historical perspective. 

1982: The BSE (the National Stock Exchange did not exist then) saw an unprecedented crisis when a bear cartel tried to corner Reliance Industries. The founder of the conglomerate, Dhirubhai Ambani, outsmarted the cartel with some wily moves that is now part of market lore. The market had to be shut down for three days. 

That year was also a difficult one for the economy. India had to borrow $5 billion from the International Monetary Fund. 

1991-92: Indian investors experienced a stock market blowout courtesy what is popularly known as the Harshad Mehta scam. Big bull Mehta used an instrument called bank receipts to access unlimited bank funds to drive up stocks. Between April 1991 and April 1992, the Sensex ran up from 1,204 to 4,546 or 275%, which is still a record. The decade ended in the wake of the 1997 Asian currency crisis and the dotcom bubble. The Sensex did not cross its 1992 peak until 1999 when a millennial date glitch called Y2K problem built a new sector—software services—which began edging out old economy stocks. 

2001-02: Those were the years of another scam, infamously known after its alleged mastermind, stockbroker Ketan Parekh. It coincided with the dotcom bust. In July 2002, the NSE’s fifty share index, Nifty, recorded a 9.35% fall. The index, which was then just six years old, would not see that kind of erosion in a single month for the next 17 years. The second year of the new millennium was also when the indices were the cheapest in decades. In October 2002, the Sensex was trading at just over 12 times the earnings of the companies listed on it and the Nifty was trading at a multiple of 14. 

Soon hockey sticks started appearing on the index graphs. The bull run lasted five years and the Sensex topped the 20,000 peak in December 2007. By mid-2007, however, a mortgage crisis was building up in the US. Hedge fund Bear Stearns was in trouble. Then the 158-year-old Wall Street marquee, Lehman Brothers, went bust in mid-September of 2008, triggering what is now referred to as GFC 2007-08 or the Global Financial Crisis. 

The Sensex lost more than half its value in two months but began recovering after central banks of major economies began coordinated action and the Indian government launched a massive fiscal stimulus. 

2011-12: The stimulus spoiled public finances. By 2012, the Indian economy was in the doldrums and sentiment was at its lowest ebb. Although a retrospective tax law drew flak, it did not scare away portfolio investors. The markets had hit a pause in the first three years of the decade and then started moving up again, the Sensex scaling 30,000 in February 2015 as India celebrated the first full-majority government in 30 years. It passed 40,000 in 2019. 

It plummeted below 30,000 in March 2020 when Covid-19 gripped the world and the government imposed an unprecedented national shutdown. 

What followed was an incredible paradox. Even while the economy shrunk, shares rose. It was not limited to India but a global phenomenon. Ample liquidity, swelling mutual funds, a leap in digital transactions and a new generation of retail investors fuelled a bull run. It catapulted the Sensex from 27,500 in April 2020 to a record 62,245 in October 2021 and the Nifty from 8,083 to 18,338 during the same period, both gaining a phenomenal 126% in 18 months. That party is perhaps ending. 

What next: “Expectations for the year are muted,” a fund manager who handles several high net worth portfolios told The Intersection on condition of anonymity. 

Market participants whom The Intersection spoke with believe a steep correction of anywhere between 25% and 35% is in the offing and there are multiple variables that could trigger it. Whether it will be a drawn-out slide in value over weeks or a quick, painful fall is anybody’s guess. 

Rate shock: The biggest known risk to stocks is the expected rate hike by the US Fed. The Fed is expected to raise interest rates three or four times in 2022 with the first one likely in the first quarter itself. “It is going to hurt,” said the fund manager quoted above. “The rate rise will increase the cost of borrowing by about 100-150 basis points,” he said. To illustrate, if the borrowing cost was 10% earlier, it could go up to 11%-11.5%.

LIC IPO: The earlier quoted portfolio manager said the initial public offer (IPO) of the government-owned life insurer would be a landmark. At an expected valuation of over $100 billion, the scale is massive. It has to be completed before March 31 this year for the government to meet its disinvestment targets for FY22. If it slips into the next fiscal year, new rules for IPO financing and curbs on rich investors could dampen participation.

UP Elections: While a state assembly election should hardly be cause for concern for stock markets, a loss for the Bharatiya Janata Party will sow doubts in the minds of investors whether Prime Minister Narendra Modi will be able to do an encore of 2019 in the 2024 national elections. That could affect investor sentiment. The unofficial betting markets in Mumbai and Gujarat, sources say, are now offering marginally better odds for the BJP winning. A month ago the odds were against it.  

Global tech bubble: The soaring valuations of technology companies globally could be a bubble that might get deflated once rates start to rise. Even Indian tech stocks that comprise more than a third of the Nifty could be in for a rerating. Paradoxically, it might happen once the economy opens up as a huge chunk of software services companies’ expense is travel. Their margins widen with remote work. 

Although investors were bracing for a sharp drop, they also expect another bull run after the correction.

2003 redux? While any of these factors could trigger a mini-collapse this year, investors and analysts believe that once it’s over, Indian shares will find their mojo again. According to one person, stocks would see earnings-led expansion for the first time. Over the past few years, companies have de-leveraged and banks have cleaned up their books. With companies ready to spend and banks willing to lend, India could see more projects coming up, credit expanding and the economy growing. 

Unless of course, the dreaded Coronavirus decides to overstay.  

ICYMI

Concentration, Interrupted: The mobile phone and a multitude of social media apps have taken over our lives. And, it is tough to disconnect. In his book Stolen Focus: Why You Can’t Pay Attention, Johann Hari attempts to demystify our shortening attention spans and digs deeper into the digital war that keeps us hooked 24*7. 

Capitol Injustice: The 2021 US Capitol Attack was a defining moment in American politics. One year later, the anger is intact even as the criminal proceedings are underway. This Slate investigation looks at the 733 arrests from the riots to discover lenient treatment by the criminal justice system. 

Word Fad: The morning routine for 2022 is set, thanks to Wordle. The puzzle created by Brooklyn’s Josh Wardle gives players six attempts to guess a random word without being bothered by unwanted ads, notifications and pop-ups. But the fun fact here is that Wardle developed Wordle just for his partner who loves word games. And now, the world is playing it. 

Crypto Dam: What requires uninterrupted and cheap electricity? Bitcoin mining. That’s exactly what cryptocurrency miners are lobbying for in Paraguay. This union wants affordable power by getting a fair share of the energy produced via the Itaipú Dam from Brazil.

Man-made Land: The super-wealthy across the world have been taking over parts of the sea and building artificial islands. This photographic series looks at how water bodies and reefs have been usurped, destroyed and concretised. The future consequences of these actions could well be disastrous.  

Glitzy Dreams: Private equity giant Blackstone made bold moves to expand its entertainment business in 2021. This was a stark departure from its traditional bets—real estate and infrastructure. This piece chronicles the behind-the-scenes strategies of the PE firm’s strategy to make it big in the entertainment content space.

— By M Saraswathy

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