Mohit Ralhan, Managing Partner, TIW Capital Group said that stock picking in 2022 will be a bit more challenging and investors should be careful of the valuations that they are willing to pay. 

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In an interview with Zeebiz's Kshitij Anand, Ralhan said over the last decade, growth stocks have performed better than value stocks but 2022 is likely to be a typical good year for value stocks. Edited Excerpts -

Q) RBI maintained a dovish stance while keep policy rates unchanged, which came as a welcome surprise for markets. What rate trajectory do you foresee in near future?

A) The trajectory of rates will depend upon the inflation and the quantum of a policy rate increase by central banks of other major economies, especially the USA.

RBI’s medium-term target for inflation is 4% within a band of ± 2%. Till December 2021, inflation had remained well below the upper band of 6%.

RBI’s recent forecast has put inflation for FY-22 at 5.3% and it expects inflation to ease down to 4.5% in FY-23. These are important levels but the most critical is the upper band of 6%.

Till the time, inflation doesn’t breach this upper band, RBI has headroom to not shift to a hawkish stance. Incidentally, the inflation accelerated to 6.01% in January and therefore the inflation levels in Feb and March have now become an extremely important metric to watch.

Also, the US fed is widely expected to increase policy rates as the inflation in the US is also rising significantly. Overall, there is more likelihood of an increase in policy rates by RBI as well and the quantum may be 50 bps to 75 bps in 2022.

Q) Indian market picked up momentum post Budget after initial US Fed jitters stabilized. What are your views on markets for 2022 and what will likely be the next triggers?

A) The direction taken by the Russia – Ukraine crisis is the immediate trigger. The market has been volatile driven by the uncertainty over the war and whether it will happen or not.

The likelihood of war happening, in my view, is low but it may take a few weeks of geopolitical manoeuvring which means that sometimes war will look imminent triggering panic driver reactions in the market.

As far as 2022 is concerned, the overall upside may be limited in this particular year given the significant bull run since April 2020 and the global macro-economic factors.

It is likely to be a year of stabilization and normalization. But the long-term bull run in India continues as our economic growth picks up pace. This decade is likely to be an excellent one for equity investors.

Q) Budget 2022 was focused on boosting growth – do you see sectoral rotation taking place? Which should long term investors focus on?

A) The bull run in 2021 was led by utilities, industrials, materials, real estate, IT, and telecom sectors. It was also driven by a significant increase in investments by FIIs on the back of surplus liquidity and balance sheet expansion by central banks across the globe.

With the imminent unwinding, sector rotation is likely to happen. We have already seen that FIIs are now turning to be net sellers. The investment money is likely to move to sectors such as FMCG and BFSI in 2022.

Auto is another sector, which has been a laggard in 2021 and where long-term bets can be taken, especially on the back of the shift towards the electrical vehicle ecosystem.

Q) Which theme will dominate markets in 2022 – value of growth? We saw a lot of liquidity chasing many mid and small cap stocks in 2020-2021 to tap growth. What are your views?

A) Over the last decade, growth stocks have performed better than value stocks but 2022 is likely to be a typical good year for value stocks.

Higher inflation and shift towards hawkish stance by central banks usually favor value stocks.

Stock picking in 2022 will be a bit more challenging and investors should be careful of the valuations that they are willing to pay.

Q) Crude seems to be on the boil. What is your call on the commodity market in 2022?

A) Commodity prices have witnessed a significant increase in 2021. Fitch’s aggregate commodity price index increased by 44% in 2021. It’s a huge jump, driven largely by energy prices, where the average increase was more than 90%.

The price of industrial metals also went up by 50%. Given this backdrop, the commodity prices, as a basket, are likely to come down as supply-side challenges ease-out, economies around the world normalize and the battle against inflation intensifies.

This expected easing out is likely to happen towards the second half of 2022. The prices may continue to rise over the next 2-3 months and in any case, it is likely to remain volatile.

Q) Given the government focus on pushing CAPEX are there any sectors poised for re-rating?

A) The government's focus on pushing CAPEX is not a surprise as it was widely expected. The government has been quite aggressive on infrastructure spending.

The increase in capital expenditure allocation of 35% was a bit higher than the market expectations but it is more likely that re-rating at sector level will not be significant.

This sector has also been one of the best performing in 2021 and overall, we remain cautious in the current market scenario.

Q) Any new age developing themes which investors can look at for the next 2-3 years? And the ones which one can avoid amid high valuations?

A) High valuations are company-specific and should be avoided right now at least in 2022. Once the macroeconomic factors stabilize, the traditional growth stocks may again become favorable.

But there are several themes which are expected to play out irrespectively. The theme of electric vehicles and development of whole ecosystem is going to be one of the most interesting developments.

It also means that some of the incumbents will face heat and may not be able to sustain their current market share. Another sector where an excellent story is playing out is chemicals.

After IT and pharmaceuticals, chemicals are another knowledge-driven sector, where India can build significant comparative advantage and the process is on.

The IPO market in India will expand significantly and a significant number of companies, especially in the new age sectors such as digital, payments, e-commerce, and ed-tech are likely to get listed and become available for public investing.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)