Beat the Market in 2022 by Investing Strategically in Three Sectors

Retail engagement at an all-time high and cheap money have combined to propel most markets to new highs in 2021. The durability of other developed and growing markets, such as India, is due to the strength of the mother market, the United States. The frenzied retail involvement is a brand-new phenomenon that has made market forecasting extremely difficult.

A few data pieces that shed light on the unparalleled retail euphoria and its market impact will help us put the issue in context. In the year 2021, US investors downloaded 15 million trading applications and put $1 trillion into the stock market. This investment is greater than the total investment made during the previous 20 years. In the United States, retail investors now hold 12 times as many stocks as hedge funds. Cheap money has created a favorable environment for stock investing and trading.

The pandemic has sparked a global phenomenon of increased retail participation. India is a clear example of this trend in emerging markets. Although retail engagement is desirable, there is a risk of enthusiasm and a complete disregard for valuations.

Huge collisions are followed by sharp rebounding

A key takeaway from stock market history is that a strong drop is almost always followed by a sharp rebound. Both on the upside and the negative, the stock market frequently overreacts. During a bull market’s enthusiasm, valuations rise to unsustainable levels, resulting in a severe drop. During a crash, panic causes valuations to plummet, which leads to buying, beginning a recovery. This trend keeps repeating itself. For investors, this has ramifications.

Take a look at the history of recent market crashes and the subsequent recoveries. During the 1998-2000 tech bubble, prices reached unsustainable heights, resulting in a dramatic 49% drop from the peak in 2000. After a period of consolidation, the market had a rapid bounce of 140 per cent in 9 months in 2003-04. During the Global Financial Crisis in 2008, one of the worst stock markets falls in history occurred. The drop was a whopping 65 per cent. Then, after plunging to new lows in March 2009, the stock rose 180 per cent in 15 months. Following the pandemic’s outbreak in March 2020, the stock market dropped by 40% in a matter of weeks. This was followed by a 135 per cent increase in 18 months.

What can we learn from this pattern? Returns in the stock market occur in fits and starts. Periods of an ecstatic surge, harsh declines, and consolidation will all occur. Rather than buying at the height of a bull market, big money is made by investing systematically and patiently throughout a bear market. More crucially, a simple investment strategy produces greater returns: investing in high-quality firms that regularly provide superior cash flows. A smart investment plan is more akin to running a marathon than a sprint. It is impossible to time the market. It is more crucial to spend time in the market.

The race to recover from the March 2020 catastrophe appears to be gone. This rally, which lifted the Nifty from 7,511 in March 2020 to 18,604 in October 2021, yielded a 135% return in 19 months. This one-way rise finished with a correction of more than 10% from the top. Unsustainable valuations and unrelenting selling by FIIs (foreign institutional investors) have now put a ceiling on the rise.

Expect moderate returns in 2022

Returns are expected to be mild in 2022. As a result, investors should concentrate on two things: one, looking for segments and businesses that can outperform the market, and two, investing carefully over time. In 2022, new virus varieties and rising interest rates may cause issues. These problems may cause market corrections, which could turn into buying opportunities.

With targeted investment, you can outperform the market

The IT, financials, and construction-related areas all appear to have promising futures in 2022. Due to continued FII selling, financial stock valuations, particularly those of top banks, remain appealing. Accelerating digitalisation has generated a multi-year upcycle in IT. Although IT values are expensive, earnings visibility is excellent. Low borrowing rates are causing a construction boom, which will help all construction equities. In 2022, focusing on high-quality stocks in these areas could result in market-beating returns. SIPs in mutual funds can be used to invest in mid-and small-cap stocks (systematic investment plans).

Book some profits and move some money to fixed income as a precautionary step. Gold ETFs are also a smart way to protect against rising prices and a weakening rupee. Look beyond 2022 and make long-term investments. SIPs should be continued. The rally that saw the Nifty rise 135% from its March 2020 lows is now over. The marathon has begun.