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Niraj Kumar, Chief Investment Officer of Future Generali India Life Insurance Co Ltd believes that the fiscal year FY21 was no doubt a challenging year for humanity, but paradoxically, it was a stellar one for markets!

The global and domestic equities have touched historic highs, aided by strong liquidity boost (QE & rate cuts) by central banks, wide fiscal stimulus by the governments all over the world along with the advent of the vaccine that aided in reviving the sentiments & economic recovery. Indian equities have given a stellar 70 per cent returns in FY21, outperforming most of the developed and emerging markets’ major equity indices. While the markets may have given a whopping 70 per cent returns in FY21, but these phenomenal returns are stemming from the backdrop of an unprecedented decline of 40 per cent in Nifty over February & March 2020.

Clearly, in the backdrop of having staged a heroic recovery in FY21, the markets are bound to take some breather and see consolidation in FY2022. Markets at this juncture are witnessing bouts of volatility, as on one side, they are posed with risks looming from the second wave & localised lockdowns, while on the flip side, they are juxtaposed with excellent performance posted by corporates across sectors in the current earnings season with a not-so-bleak-growth outlook.

Although the incumbent COVID second-wave situation is quite grim in India, and the economy & markets are clouded with concerns around the sharp & virulent second COVID wave, which can impede the recovery, we reckon the impact to be ‘transient‘. We believe that Indian economy will be able to sail through this too, as testified in the past and that, it’s likely to have a lesser impact on the economic activity this time around, as there have been fewer restrictions with respect to goods movement vis-a vis first wave.

Besides, as per the experience of other nations hitherto, the second wave though is more virulent and is spreading at a rapid pace than the first wave, it's also tapering at a faster rate. Hopefully, this is the case with India too. The widespread vaccination pick-up will be the key barometer for the economy and markets from here on. India is clearly on the cusp of a virtuous economic growth cycle, which will culminate into stronger momentum of earnings recovery and aid the markets to perform reasonably well. We believe that despite the current second wave, India will have a GDP growth of more than 10 per cent in FY2022 and 7 per cent in FY2023. Given this strong growth outlook, we believe that any deep corrections in the Indian market should be leveraged as an opportunity to buy and create long-term wealth.

Investment trends for retail investors

The equity market moves in FY21 were nothing short of being spectacular and has been literally a one-way rally post the fall that we witnessed in March 2020. A lot of retail investors have forayed into equity markets over the last one year and have seen the markets only go up with no drawdown in their portfolio hitherto. The most obvious question, which would come to an investor’s mind after such a resounding move is perhaps, how one should position themselves in the current market environment? There is a risk that these investors might get carried away with the initial success but the real litmus test of their emotional quotient would be when the markets correct and whether these investors will be able to see their portfolio in losses and still not panic?

To avoid this kind of a situation, we urge that investors should continue to rebalance their portfolio as per their asset allocation needs & risk profile frequently. Discipline is the single most important factor that determines the long-term success for an investor. Rather than continuously trying to find the new theme or trends to invest in, the investor should adopt a portfolio approach wherein, the long-term goal setting and asset allocation call is the biggest call that any retail investor has to take. While equities are indeed an essential part of the portfolio for wealth creation, due importance also must be given to other stable investment vehicles. Besides, in case, the investor does not have the requisite skill sets to do stock picking, he can partake in equities through various alternative investment vehicles such as ULIP, mutual funds, etc and leave the difficult task of picking new theme or trends to the professional money managers/fund managers.

Sectors to avoid or watch forward

We believe the global and Indian economy is at the cusp of a virtuous economic growth cycle with a strong cyclical recovery underway. As the vaccinations pick up globally and in India, we are likely to see significant pent-up demand coming back. Essentially, we believe that global economic recovery is likely to be swifter than the Indian economic recovery in the near term, as India continues to battle with the second wave of COVID-19. So, in the near term, we would like to focus on global cyclical sector. We also believe that India’s secular growth story remains strong. The Union Budget 2021-22 has also laid the groundwork for a major economic reset with the government clearly prioritising growth over fiscal conservatism. We, thereby, advise investors to position themselves in the economy facing cyclical sectors such as banking & financials, consumer discretionary, cement, and infrastructure, etc. These sectors are expected to be the prime beneficiary of the operating & financial leverage as growth picks up. We would also recommend investors to look at sectors where the competitive dynamics have changed drastically over the last few years- such as telecom & real estate. Besides as a theme, we see deep value in some large PSUs, but one will have to be extremely meticulous in terms of stock picking here. I would also suggest investors to avoid sectors and companies, where the pricing dynamics is not very favourable and they are finding difficult to deal with the strong inflationary pressure.