Tuesday, October 13, 2015

Strategy update

"Selfishness must always be forgiven you know, because there is no hope of a cure."
—Jane Austen
(British, 1775-1817)
Word for the day
Divulgate (v)
To make publicly known; publish.
(Source: Dictionary.com)
Malice towards none
No one has any doubts that the Congress Party is playing as 12th man in the Bihar Polls.
No one dare ask the leadership — "what's the plan?"
Strategy update
Continuing from last week (see here) I present my thoughts on the appropriate investment strategy in accordance with the emerging economic trends.
Trend 1: Economic growth will remain slow to moderate for FY17 too, as the global economy struggles with Chinese slow down, EU and Japan stagnation, and US policy adjustment.
The capacity utilization in India which is presently at much below optimum level, may not improve so as to motivate capex even in FY17; regardless of lower rates. The growth will therefore mostly come from consumption and productivity improvements.
Technology, innovation and services will therefore remain top investment themes. Replacement cycle, especially in utilities and public services, appears an interesting theme to me; in particular power T&D, public transport, financial service look most promising.
Trend 2: The process of elimination to begin forthwith. The global capacities rendered redundant by Chinese slow down and down commodity cycle will get to play a major role in Indian growth. Global E&C services companies will get to play a larger role in Indian growth economics.
The inefficient domestic players, not only less productive small and medium enterprises (SME), but also large PSU and private enterprises, will face serious existential threat from global competition. The government protections like defense set off clause and tariff barriers and FDI limit etc. may be eased materially to maintain growth rate and overcome shortages of capital. To me therefore the Indian businesses of global corporations are preferred over pure domestic E&C services and capital goods companies.
Trend 3: Despite lower inflation and positive real rates the growth in private consumption will remain skewed in favor of upper middle class and rich. Middle class discretionary spend will be constrained by lower employment and wage growth, higher education, health and skilling expenses.
The consumption stock, all richly valued, may not see any major sell-off due to lower growth, but a time correction looks more likely. I would therefore mostly prefer luxury and a little necessity in consumption. For example, I would prefer BMW/Merc over Alto, Fan and Led over AC, Premium liquor over cigarette, dental hygiene over biscuits etc.
Trend 4: Cost of doing business is likely to increase due to higher taxes, stricter compliance norms, enhanced social responsibility standards, transparent and accountable administration, etc.
I would therefore prefer, companies paying full taxes, are already fully compliant and socially responsible as opposed to those known for efficient tax management and political connections.
Trend 5: Inclusive and sustainable growth would indubitable mean faster and deeper growth of financial sector.
I have been underweight on financials (zero weight for PSU banks for last three years). I guess this would need a change now. Will let you know when I figure out how to do this.

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