While fixed deposits gave negative returns after adjusting for inflation and gold was a losing investment (all returns as of 17 December), stock prices surged and cryptos went through the roof. This was also the year when perennially out of favour sectors like public sector banking stocks as well as real estate stocks came to join the party. The stocks of public sector enterprises did well too.
The increased risk taking was also reflected in the rapid rise in the number of demat accounts and individuals betting big on crypto and winning and losing along the way.
So, what changed in 2021? Why did risk-taking become the norm? Who won? Who lost? And how will things play out in the months ahead?
On 31 December 2020, the BSE Sensex, India’s most popular stock market index, closed at 47,751 points, having run up quite a bit from a low of 25,981 points as of 23 March 2020. On 31 December, the price-to-earnings ratio (stock price relative to current earnings) of the 30 stocks that make up the Sensex stood at 33.50—a very high level that had almost never been seen before. This meant that investors were ready to pay ₹33.5 for every rupee of earnings for stocks that constitute the Sensex.
For investors who had ridden the stock market wave up until then, it perhaps made immense sense to book profits and get out of the market. But doing that would have led to letting go of the stock market returns during 2021.
Stock prices continued to rally in 2021, with the Sensex closing at an all-time high of 61,766 points on 18 October. As of 17 December, the Sensex has given a return of 19% during this year. This does not sound high enough given the times that we live in, where crypto prices can double in a few months, if not a few weeks. But in comparison to the 5% interest available on a one-year fixed deposit, stocks have generated bumper returns.
Much of the action happened beyond the Sensex stocks. Take the case of the BSE Small Cap Index, which has gone up by 57% this year (after going up by 32% in 2020). Leading the pack here is Brightcom Group, a Hyderabad-based adtech company, which has delivered a return of 2769% as of 17 December (see Chart 1).
Among the top 20 performers in the small cap index are two interesting companies—Saregama and Tips Industries—which have given a return of 496% and 401%, respectively. These companies were in the business of selling music cassettes up until the early 2000s. Music cassettes are long gone but the companies have survived by diversifying into other verticals, such as selling digital radios and producing movies.
Another interesting beyond-the-Sensex story is that of the Indian Railways Catering and Tourism Corporation (IRCTC). The stock price as of 31 December 2020, was at ₹288 (adjusted for the stock split). From that point, it rose to a peak of ₹1,176 as of 18 October. This meant a return of 308%. The stock is currently priced at ₹832. A bulk of this fall happened before the government announced on 28 October that IRCTC would have to share the convenience fee it earns from passengers who book railway tickets on its website with the Indian Railways. A section of the market perhaps knew about the upcoming government decision and sold out before the decision was announced. Nonetheless, investors who entered this stock early made good money.
2021 was also the year when long-term underperformers finally found their mojo. An excellent example of this is the State Bank of India, whose stock price has risen by 70%. The Indian Overseas Bank has outperformed SBI, rising by 93% during 2021. In fact, public sector banking scrips have done well in general. They’ve outshone new-generation private sector banks, except ICICI Bank, which rose by 36%.
Lenders like HDFC Bank and Kotak Mahindra Bank, which have been perennial darlings of the stock market barely gave any returns during 2021. HDFC Bank has risen by just 3%. Kotak is down 10%.
The Nifty PSU Bank Index, which constitutes 12 listed public sector banks and the Jammu and Kashmir Bank, has given a return of 47% during the year. In comparison, the Nifty Private Bank Index has gone up by just 5%.
A major reason for this lies in the fact that the balance sheets of public sector banks have gotten a little better over the years, as bad loans have been gradually written off. Also, with retail money coming into the stock market at a rapid pace, the stock brokers needed newer stories to sell to investors.
Other than public sector banking, the realty sector also found favour with investors. The Nifty Realty Index was among the best performing indices during the year—giving a return of 52%. When it comes to real estate, investors seem to have bought the story that people need bigger home space in order to be able to work from home post covid.
The metals sector, which consists of companies involved in making steel and extracting aluminium, copper, zinc, etc., has been another standout performer. The Nifty Metal index has given a return of 68% till date. This has primarily been on account of rising prices of metals globally. Nonetheless, most of these stocks are down majorly from their highs reached earlier this year.
The metals sector is a very good example of how 2021 has played out, with sectoral bets like banking, real estate, power etc., giving outsized returns, in comparison to the Sensex which has given a return of around 19% and the Nifty which has given returns of around 21%. Of course, the trouble with making sectoral bets is that while the prices can go up very fast, they can also fall with equal speed. In fact, cryptos are by far the best example of this phenomenon.
2021 is the year when the average Indian discovered investing in cryptos. This was on the back of a huge surge in crypto prices and very strong marketing campaigns carried out by crypto platforms. In an advertisement in early November, the exchanges claimed that Indians had invested over ₹6 trillion in cryptos.
A single unit of the most famous crypto, bitcoin, was priced at $29,002 as of 31 December 2020. By 8 November, it had risen by 133% to $67,567. But this is small change in comparison to what some other cryptos have achieved. Take the case of Shiba Inu, a crypto which was priced at $0.000000000073 per unit as of 1 January, rising to $ 0.000031per unit by 17 December.
This means a whopping return of 42465653% during the year. A $100 invested in Shiba Inu at the beginning of the year would currently be worth around $42.5 million. Of course, not many people knew about Shiba Inu at the beginning of the year and even if they did, they had no idea it would rise so fast.
Other cryptos like Axie Infinity, Solana etc., also did very well during the year. Of course, there are others like the Squid Game crypto, which fell from a peak price of $2,841 to close to zero—falling by 99.99% in a matter of minutes on 1 November.
Risk hai to ishq hai
All these examples bring us to the corollary of high-risk/high-return, which is that high risk does not always mean high return. Basically, what all the examples cited above tell us is that those who were invested in stocks and those who had discovered and believed in cryptos at the beginning of the year are the ones who have done well by taking the risk that they have.
The trouble with retail investors is that they start investing after they have seen a considerable amount of money already being made. Take the case of demat accounts. Between December 2019 and December 2020, the number of demat accounts went up by 26%—from 39.4 million to 49.8 million. Further, between December 2020 and October 2021, the number of demat accounts went by around 48% to 73.8 million.
Around 1.7 million new demat accounts were opened in February 2021. By October, this had jumped to 3.5 million accounts (see Chart 2). What needs to be pointed out here is that the Sensex touched an all-time high in October. Clearly, the more the stock market goes up, the more the retail investors it attracts. These investors who entered the stock market at its peak would now be sitting on losses.
A similar case must have played out with cryptos as well. The other big thing in the case of cryptos is that people don’t seem to be investing significant amounts in it. As RBI Governor Shaktikanta Das had said in November: “70% or more have invested ₹1,000-3,000 (in cryptos).” If this is the case, a bulk of crypto investors have just had a good time and barely made any money. Also, the bigger question is: Who are the Rakesh Jhunjhunwalas of crypto in India? When are we going to see them?
Hence, the moral of the story is that there is no fool-proof way to play and benefit from a high-risk high-return strategy. The only way to ensure that one does not miss out on such rallies is to go back to the age-old investment tactic of diversification, which means to spread out money across different investments and also within them.
The price-to-earnings ratio of the BSE Sensex currently stands at 26.76, lower than where it was at the end of 2020, but still much higher in comparison to historical standards. It also needs to be pointed out that the stock market rallied in 2020 because of the huge amount of money brought in by the foreign investors (about $23 billion) searching for higher returns, given the low interest rates in the Western countries. In 2021, this has fallen to $4.5 billion, with the foreign investors net selling stocks in October, November and December. This, to some extent, explains why the Sensex has fallen by 7.7% from its 18 October peak.
To conclude, the Federal Reserve of the United States, the American central bank, has now decided to stop printing money by March 2022 and raise interest rates after that. The Bank of England has already raised interest rates. If this continues, the chances of fresh foreign money coming into India in search of higher returns in 2022 will come down.
In fact, even in 2021, the stock prices have been driven primarily by domestic Indian investors. The question is: Will the domestic investors continue to bet big on the stock market in 2022 as well? Will their ishq with risk continue? We will come to know soon.
(Vivek Kaul is the author of Bad Money.)
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