Investors’ dilemma

Over the last couple of years, more and more analysts have started questioning India’s economic growth. Many reports now point out that some of the strongest areas of India's economy, like private consumption and services exports, are starting to face serious challenges.

As a small investor, the biggest concern that stands out for me is the cycle we seem stuck in: poor wage growth leads to low savings, which in turn lowers investments, reduces income, cuts consumption, and hampers overall growth. Breaking this cycle is not going to be easy, and it feels like the government is also finding it challenging to break this cycle.

Indian equity markets have also been underperforming compared to global markets. And within Indian equities, some sectors that were once considered safe bets have been struggling, while others are showing signs of slowing down. Here’s what I am noticing:

The Consumption Sector: This sector, which I have always believed to be one of the safest, has yielded a return of less than 5% CAGR over the past three years (including dividends). That’s a lot slower than I would have expected, especially with the Indian market’s population size and increasing spending power.

The IT Services Sector: IT services sector has been a leader for over two decades. But the Nifty IT index has dropped by ~22% in the last year, and with concerns about the future of legacy IT services companies, it’s making me rethink my exposure to this sector.

The Power Sector: This sector seemed like it was on the rise with its focus on manufacturing, data centers, and rural electrification. While there is still long-term potential, there’s now an oversupply in the short term. If demand doesn’t catch up soon, it’s likely that the stocks of power producers will underperform.

The Real Estate Sector: Real estate has been performing really well, with the Nifty Realty index showing a solid 27% annual return over the past three years. But I am hearing that we might have already seen the peak in this cycle. Even though the weight of real estate companies in the stock market is relatively small, a downturn in the sector could impact household investors, especially since many of them are heavily invested in physical real estate.

The Financial Services Sector: This sector is the largest in India’s equity market, but things aren’t looking great for household balance sheets. Savings are down, and debt is up. Comparing India’s household debt with the developed countries’ levels is inappropriate due to various factors (like lower wages, higher unemployment, and poverty). The fact remains that many households are struggling to stay afloat. The latest bank credit data shows that while credit growth is picking up, deposit growth is lagging behind. This makes me nervous about the widening credit-deposit gap, which could lead to a systemic risk in the financial sector.

The real challenge for small investors right now is deciding how to structure our portfolios. How can we make sure we’re getting good returns without overexposing ourselves to momentum assets like crypto, gold, and silver, or putting too much in global markets that may be outperforming India but come with their own set of risks?

So, what should a small Investor do?

…to continue tomorrow (suggestions are welcome)