2021 was about high risk and high return

While term deposits gave negative returns after adjusting for inflation and gold was a losing investment (all returns were as of December 17), stock prices surged and cryptos exploded. It was also the year when sectors still in disgrace like public sector banking stocks as well as real estate stocks came to join in the fun. Equities of public sector companies also performed well.

The increased risk-taking has also been reflected in the rapid increase in the number of Demat accounts and individuals betting big on crypto and winning and losing along the way.

So what has changed in 2021? Why has risk taking become the norm? Who won? Who lost ? And how are things going to go in the months to come?

The Sensex

On December 31, 2020, the BSE Sensex, India’s most popular stock index, closed at 47,751 points, having risen significantly from a low of 25,981 points on March 23, 2020. December 31, 2020 , the price / earnings ratio (share price to current earnings) of the 30 stocks that make up the Sensex stood at 33.50, a very high level that had hardly been seen before. It meant investors were willing to pay ??33.5 for every rupee of earnings for the stocks that make up the Sensex.

For investors who had been riding the stock market wave thus far, it may have made a lot of sense to post a profit and exit the market. But that would have led to abandoning stock returns in 2021.

Stock prices continued to rally in 2021, with the Sensex closing at an all-time high of 61,766 points on October 18. As of December 17th, the Sensex has returned 19% in that year. That doesn’t seem high enough given the times we live in when crypto prices can double in a matter of months or even weeks. But compared to the 5% interest available on a one-year fixed deposit, stocks have generated exceptional returns.

Much of the action took place beyond the Sensex actions. Take the case of the BSE Small Cap index which rose 57% this year (after increasing 32% in 2020). Leading the way is Brightcom Group, a Hyderabad-based adtech company, which achieved a return of 2,769% as of December 17 (see graph 1).

Among the top 20 performers on the Small Cap Index are two interesting companies, Saregama and Tips Industries, which returned 496% and 401%, respectively. These companies sold music cassettes until the early 2000s. Music cassettes were long gone, but the companies survived by branching out into other sectors, such as digital radio sales and film production.

Another interesting story beyond the Sensex is that of the Indian Railways Catering and Tourism Corporation (IRCTC). The share price on December 31, 2020 was ??288 (adjusted for stock split). From this point it reached a peak of ??1,176 to October 18. This meant a yield of 308%. The share is currently listed on ??832. Much of this fall occurred before the government announced on October 28 that the IRCTC should share the convenience fees it collects from passengers who book train tickets on its website with the IRCTC. Indian railways. Part of the market may have been aware of the upcoming government decision and sold before the decision was announced. Nonetheless, the investors who got into this action early made a lot of money.

Surprise Surprise

2021 was also the year the long-term underachievers finally found their mojo. A prime example is the State Bank of India, whose share price rose 70%. Indian Overseas Bank outperformed SBI, rising 93% in 2021. In fact, public sector banking scripts have generally performed well. They were ahead of the new generation private sector banks, with the exception of ICICI Bank, which grew by 36%.

Lenders like HDFC Bank and Kotak Mahindra Bank, which have been perennial stock market darlings, reported next to nothing in 2021. HDFC Bank grew only 3%. Kotak is down 10%.

The Nifty PSU Bank Index, which includes 12 listed public sector banks and the Jammu and Kashmir Bank, returned 47% during the year. In comparison, the Nifty Private Bank index only rose 5%.

One of the main reasons for this is that the balance sheets of public sector banks have improved a bit over the years, as bad loans have been gradually written off. Additionally, with the rapid arrival of retail money in the stock market, stock brokers needed new stories to sell to investors.

Besides the public banking sector, the real estate sector has also found favor with investors. The Nifty Realty Index was one of the best performing indices of the year, returning 52%. When it comes to real estate, investors seem to have bought the story that people need more domestic space to be able to work from home after covid.

Another notable player has been the metals sector, which consists of companies involved in steel fabrication and mining of aluminum, copper, zinc, etc. The Nifty Metal Index has returned 68% to date. This is mainly due to the rise in metal prices on a global scale. Nonetheless, most of these stocks are down sharply from their highs reached earlier this year.

The metals sector is a great example of how 2021 has played out, with sector bets like banking, real estate, electricity, etc. gave yields of approximately 21%. Of course, the problem with sector betting is that while prices can go up very quickly, they can also go down at an equal rate. In fact, cryptos are by far the best example of this phenomenon.

2021 is the year the average Indian first discovered crypto investing. This happened as a result of a huge surge in crypto prices and very strong marketing campaigns by crypto platforms. In an advertisement in early November, the stock exchanges claimed that Indians had invested more than ??6,000 billion cryptos.

A single unit of the most famous crypto, bitcoin, was priced at $ 29,002 as of December 31, 2020. As of November 8, it had risen 133% to $ 67,567. But that’s a small change from what other cryptos have achieved. Take the case of Shiba Inu, a crypto that was priced at $ 0.0000000073 per unit on January 1, rising to $ 0.000031 per unit on December 17.

That means a whopping 42,465,653% return over the course of the year. $ 100 invested in Shiba Inu earlier this year is currently worth around $ 42.5 million. Of course, not many people knew about the Shiba Inu at the start of the year and even if they did know him, they had no idea it would increase so quickly.

Other cryptos like Axie Infinity, Solana etc., also performed very well during the year. Of course, there are others like the crypto Squid Game, which went from a record price of $ 2,841 to near zero, dropping 99.99% in minutes on November 1.

Risk from hai to ishq hai

All of these examples bring us to the high risk / high return corollary, which is that high risk does not always mean high return. Basically what all of the examples cited above tell us is that those who invested in stocks and those who discovered and believed in cryptos at the start of the year are the ones who did well by taking the risk. that they took.

The problem with retail investors is that they start investing after seeing a considerable amount of money already being made. Let us take the case of demat accounts. Between December 2019 and December 2020, the number of mat accounts increased by 26%, from 39.4 million to 49.8 million. In addition, between December 2020 and October 2021, the number of mat accounts increased by approximately 48% to reach 73.8 million.

Around 1.7 million new demat accounts were opened in February 2021. By October, this figure had risen to 3.5 million accounts (see graph 2). What should be emphasized here is that the Sensex hit an all-time high in October. Clearly, the more the stock market rises, the more it attracts private investors. Those investors who went public at its peak would now be sitting on losses.

A similar case must have happened with cryptos as well. The other great thing about cryptos is that people don’t seem to be investing large sums in them. As RBI Governor Shaktikanta Das said in November: “70% or more have invested ??1,000 to 3,000 (in cryptos). “If so, a large chunk of crypto investors are just having fun and barely making any money. Moreover, the bigger question is: who are the Rakesh Jhunjhunwalas of crypto in India? are we going to see them?

Therefore, the moral of the story is that there is no sure-fire way to gamble and profit from a high risk, high return strategy. The only way to make sure you don’t miss out on such gatherings is to go back to the age-old investment tactic of diversification, which means spreading the money across and also within different investments.

The Sensex BSE price-to-earnings ratio currently stands at 26.76, lower than it was at the end of 2020, but still much higher by historical standards. It should also be noted that the stock market recovered in 2020 due to the huge amount of money brought in by foreign investors (around $ 23 billion) looking for higher returns, given the rates of exchange. low interest in western countries. In 2021, that figure fell to $ 4.5 billion, as foreign investors sold net shares in October, November and December. This explains, to some extent, why the Sensex fell 7.7% from its October 18 high.

In conclusion, the US Federal Reserve, the US central bank, has now decided to stop printing money by March 2022 and raise interest rates thereafter. The Bank of England has already raised interest rates. If this continues, the chances of fresh foreign money entering India seeking higher returns in 2022 will decrease.

In fact, even in 2021, stock prices were mostly driven by domestic Indian investors. The question is, will domestic investors continue to bet big on the stock market in 2022 as well? Will their risky ishq continue? We will find out soon.

(Vivek Kaul is the author of Bad Money.)