Vijay Kumar Gaba

Fear, paranoia and resilience prevails in 1HFY22

The financial year FY22 started with the country reeling under the impact of an intense second wave of Covid-19 pandemic. The images of citizens struggling for life saving drugs and Oxygen, overcrowded cremation grounds and corpses of the victims of pandemic floating in the Ganges were imprinted on peoples’ consciousness. For once, disease, death, and desperation dominated the popular narrative.

The life seemed still with everyone becoming fearful and paranoid. It felt that spirituality and austerity would dominate the behavior of common man for many months to come. The government went into overdrive to build health infrastructure, provide assistance to helpless citizens and planned, what would eventually become, the biggest public vaccination drive ever in history of mankind. The austerity and fiscal discipline did not appear to be anywhere in the list of top priorities.

The macro economic data for 1QFY22 however presented a slightly different picture. Private consumption was the largest contributor to the growth and government had refrained from spending much.

The 1QFY22 growth came in better than most had anticipated as the sporadic lockdowns did not affect the economic activity. The recovery in 2QFY22 appears to be much better than estimates, with many indicators reaching pre pandemic levels. The growth estimates for FY22 have been accordingly revised upwards by most agencies.

…did not impact financial markets

The financial markets also did not reflect the sentiments peddled in the popular narrative. Despite, the government incentives to promote local manufacturing; acceleration in award of contracts for large infrastructure projects; the government support and incentives for MSME credit; significant expansion in digital banking ecosystem; revival in real estate market, etc. the credit demand growth is persisting at multi decade low levels.

The stock market has witnessed heightened activity, with benchmark indices gaining close to 20% in 1HFY22 on the back of much higher participation from the household investors. Mid and small cap stocks dominated the activity, indicating the strong dominance of the sentiment of greed over the sentiment of fear.

The market rally has been rather intriguing, given that environment for equities has not been very supportive from conventional wisdom viewpoint.

The following factors, which have bothered the equity markets historically, have been conspicuous by their exalted presence.

·         The energy prices (Achilles heel of the Indian economy) have climbed sharply higher. The second round impact of the energy inflation have also become visible in higher costs of production and freight.

·         Food inflation has persisted at elevated levels. In fact, headline inflation has persisted above the RBI comfort zone for many months, terminating any chance of further monetary easing by RBI. The debate now circles around the tightening schedule of RBI.

·         The vulnerabilities of the Chinese financial system have been exposed with one of the largest real estate developer defaulting on its debt obligations.

·         The central bankers of developed countries gave clear signals that the monetary easing has peaked and their next step would most likely be the monetary tightening.

·         RBI has shown tolerance for higher yields and slightly weaker INR.

·         Institutional investors have remained on the fringes for most part of the 1HFY22.

·         The cold war like condition between US and China has intensified further. Polarization of global trade majors is also increasing

·         Geopolitical situation at northern borders remains alarming, with no resolution in sight for Sino-Indian standoff at LAC and increasing influence of China and Pakistan in Afghanistan.

·         The strong leader of Germany lost elections to the left alliance, reinforcing the trend of the left leaning socialists gaining power in most of the large countries, the environment for free trade and globalization continues to worsen.

·         The weather has been extremely erratic world over. Unusual weather pattern were seen across continents. Unusual snow fall and drought in Latin America; Drought, extreme heat and wild fires in North America; floods in Europe, China and Indian sub-continent caused extensive damage to crops and supply chain disruptions. The prices of industrial raw materials and food increased materially world over.

·         The corporate earnings have been stronger than the estimates in 1QFY22, but the valuations in many pockets are seen prohibitively high. The valuations in commodity sectors like metals and chemicals etc. seem to discounting the current inflationary trends to the eternity.

Money in pocket may not reconcile with profits shown in SM timelines

Regardless of the presence of the supposedly adverse factors, the equity markets have remained quite resilient so far.

However, in past couple of weeks the volatility in markets has increased significantly. While various commentators and observers have attributed the rise in volatility to one or more of the above listed factors; it is pertinent to note that these factors have been present, and widely acknowledged for past many months. It would therefore not be justifiable to attribute the market volatility and jitteriness to these factors alone.

The anecdotal evidence indicates that in view of the above listed factors, the participation in equity markets in past six months has been rather tentative and lacking in strong conviction.

Most investors appear to be actively trading, frequently booking small gains/losses. Thus, even though the benchmark indices have shown strong gains in 1HFY22, not many personal portfolios may be showing the matching gains.

Now, as the market commentary turns to “cautious optimism”, “fairly priced”, “Long term Story in tact” from “abundant opportunities”, “recovery trade”, “TINA for India” etc., the unconvinced investors/traders lacking in conviction are turning even more nervous.

Of course greed is still the dominating factor and not many market participants are taking money off the table; they are even quicker in booking profit and losses.

Sector shopping in search of quick gains is also gaining higher momentum leading to faster sector rotations, giving an illusion of abundant trading opportunities. Obviously, the money in pocket is not reconciling with the money being made on social media timelines.

Money made on Twitter wall is exponentially higher than what broker’s statement is depicting and that is making the investors/traders both nervous and greedier for now. So expect, the current state of volatility and low returns to continue for few more months at least.

Economy fast recovering to pre pandemic levels

As per the consensus estimates, Indian economy shall recover to pre pandemic level latest by the middle of FY23; in what is popularly called a “V” shape recovery.

The growth thereafter is expected to be more moderate. The normalized long term growth trajectory may however not reach 6%+ level (seen in pre pandemic period) till FY27 at least.

Corporate earnings - 2QFY22e growth to be moderate as base effect withers

Nifty 4QFY21 and 1QFY22 EPS growth was the strongest in more than two decades. Poor base effect and strong pent up demand were the primary causes attributed to such sterling corporate performance.

However, these factors are seen tapering from 2QFY22 onwards, and the cost pressures are rising. We may see revenue growth as well as margins moderating this quarter.

…though the long term earnings trajectory earning to remains robust

Regardless of the moderate 2QFY22 earnings growth, the long term earnings growth (Rolling 5yr CAGR) trajectory is expected to remain strong for FY23 and later years.

During 1HFY22 the market performance was dominated by the cyclical sectors like Real Estate, Metals, Energy and Infra. IT Services was the only non-cyclical sector that continued with its good performance from 2HFY21. Financials and Auto were the major underperformers.

Given their underperformance for much of the past 3-4years, sectors like Realty and Metals were significantly under-owned, it is therefore likely that most investment portfolios might have underperformed the benchmark indices.

FII remained net seller while DII were small net buyers in 1HFY22

Strong IPO markets, but lacking in convictions

During 1HFY22 over Rs59716cr were raised through 26 IPOs. This compares with Rs54576cr raised through 33 IPOs in the entire FY21. However, an analysis by the brokerage firm MOFSL highlighted that almost 52 per cent of IPO investors sold shares on the listing day. This clearly indicates towards lack of conviction amongst investors, including institutional investors, in the new businesses. Most IPO investors appear taking this as a trading opportunity to make some additional money from the funds lying in the savings account earning a pittance.

India outperformed the peers by wide margin

During 1HFY22 the Indian equities outperformed the major global market by wide margins. Nifty gained close to 20%, whereas the second best Index S&P500 of USA gained 10%. Amongst peers Brazil was the worst performing market with a loss of 7%.

As of this morning, there is great deal of uncertainty as to the shape of the global order that would emerge in next couple of years. It is highly unlikely that we would get much clarity over next 6-12months. To the contrary, it is more likely that the conditions become even more uncertain and unclear.

Insofar as India is concerned, I continue to feel that 2HFY22 may just be a continuation of 1HFY22, with some added complexities and challenges. The country may continue to witness protests and unrest. The consolidation of businesses may continue to progress, with most small and medium sized businesses facing existential challenge. Disintermediation and digitization may also continue to gather more pace.

The normal curve for the economy may continue to shift slightly lower, as we recover from the shock of pandemic. A large part of the population may continue to struggle with stagflationary conditions, with nil to negative change in real wages and consistent rise in cost of living. Geopolitical rhetoric may also remain at elevated levels.

Market Outlook – 2HFY22

The outlook for markets in the near term is mostly negative.

Macroeconomic environment - Neutral

Global markets and flows - Negative

Technical positioning – Negative

Corporate earnings and valuations - Negative

Return profile and prospects for alternative assets like gold, real estate, fixed income etc. - Negative

Greed and fear equilibrium - Negative

Perception about the policy environment - Positive

Outlook for Indian markets

In view of the positioning of the above seven key factors, my outlook for the Indian equity market in 2HFY22 is as follows:

(a)   Nifty 50 may form a short term peak in next couple of months. The process of forming the top has already started. In case the market follows the trajectory of 2HFY08, we may see the top around 18700-18900 level, followed by a sharp correction. However, if Nifty follows the pattern of 1HFY07, we may see top around 18200-18300 followed by a sharp 20% correction and a sustained rally thereafter.

(b)   The outlook is positive for IT, Insurance, large Realty, healthcare, agri input, and consumer staples, negative for commodities, and neutral for other sectors.

(c)    Benchmark bond yields may average below 6.5% for 2HFY22. INR may average close to 74 in 2HFY22.

(f)    Residential real estate prices may show a divergent trend in various geographies, but may generally remain strong. Commercial and retail real estate may also continue to see recovery.

Key risks to be monitored for the market in 2HFY22

1.    Relapse of pandemic leading to a fresh round of mobility restrictions. (Less likely)

2.    Significant worsening of Sino-US trade relations.

3.    Material tightening in trade, technology, and/or climate regulations in India and globally.

4.    Hike in effective taxation rate to augment revenue.

5.    Material escalation on northern borders.

6.    Prolonged civil unrest.

7.    Stagflation engulfing the entire economy, as inflation stays elevated and growth fails to meet the expectations.

8.    Premature monetary tightening.

Investment - Strategy

Asset allocation

2HFY22 may be a difficult period for investors, in terms of high volatility, poor expected returns from diversified portfolios and poor return from long bond portfolios as yield firm up. In view of this, I shall continue to maintain higher flexibility of my portfolio; keeping 30% of my portfolio as floating, while maintaining a broader UW stance of equity and debt.

Large floating allocation implies that I shall continue to trade actively in equity. 30% of portfolio would be used for active trading in equities and debt instruments.

My target return for overall financial asset portfolio for 2021 continues to be ~7.5%.

Equity Strategy

I would continue to focus on a mix of large and midcap stocks. The core criteria will be old economy cyclicals which are cheaper from historical and contemporary perspective, have decent market share, are changing business model to suit the new conditions, and would benefit from economic recovery.

I would target 6-7% annualized price appreciation from my equity portfolio.

Miscellaneous

I have assumed a relatively stable INR (Average around INR74/USD) and slightly higher short term rates in investment decisions. Any change in these assumptions may lead to change in strategy midway.

I would have preferred to invest in Bitcoin, but I am not considering it in my investment strategy due to inconvenience and unease of investing.

Factor that may require urgent change in strategy

·         Material rise in inflation

·         Material change in lending rates

 Over the last weekend, I attended a lecture on the doctrine of Karma, read couple of books on philosophy of investment, and observed zillion of nuggets of investment advice, apparently written by highly successful investors and/or advisors, on my social media timelines. Admittedly, all this was quite befuddling for me. Everything, I read or heard caused an overflow of conflicting thoughts and emotions. I spent the entire Republic Day holiday in extricating the entangled thoughts. I am not sure, if I attained any degree of success in my endeavour. Nonetheless, I understood the following very clearly–

(i)    Like any other Karma, the process of investing in financial products is personal to every individual. No two individuals will have exactly same investment plan – strategy, goals, process and outcome. The similarities between religion (morality, ethics etc.) and investment end here.

(ii)   Investment advisory issued (free) to common public is mostly a redundant function, inasmuch as it does not take into consideration the individual circumstances of an investor.

(iii)  Financial investment is a tiny subset of the one’s overall life. The life path one sets for himself does impact the investment plan. But vice versa may not be true. If investment plan (strategy, goals, process and likely outcome) begins to drive the life (cart before the horse), it is a huge problem.

Doctrine of Karma

Karma is perhaps the most popular word of Indian origin that has been incorporated in global lexicon. This is despite the fact that the doctrine of Karma is intrinsic to Indian belief system of rebirth and salvation and does not fit the practice of Abrahamic religions (Islam, Christianity and Judaism) and most other traditional religious belief system across Africa and Latin America.

By most simplistic definition, Karma means Acts performed by a living being. The doctrine of Karma says, insofar a living being is engaged in the eternal cycle of rebirth, the condition of present and future lives is determined by his/her Karma of past and present life.

While performance (or otherwise) of Karma is completely individual, the common goal of all Karma, performed by all living beings is to obtain release (salvation or Moksha) from this eternal cycle of rebirth. Each one has to accumulate enough good Karma that will be sufficient to secure a release from this cycle of rebirth.

The doctrine of Karma is thus motivation to live a moral & ethical life. This also explains the pain, suffering and existence of evil.

Investment advisory

Investment advisory is function of formulating a financial plan for a person or group of persons. This involves, evaluating the financial conditions of a person, setting investment gaols, making an investment strategy to achieve these goals, and assisting the person(s) in executing the plan.

Investment advice thus is very personal service. It is less likely that an investment advice shall be equally relevant for two persons or group of persons. It is therefore very important that while accepting a “common” investment advice, one needs to be extremely careful. Let me explain this by way of an example:

A “common” investment advice is that by investing in an Index Fund (passive investment), one can earn a steady return over a much longer period of time. Nifty has given CAGR of ~9% over past 30years. These 30yrs have seen extreme volatility, many wars, multiple scams, global crisis, pandemic, many droughts, extreme political instability (and stability), etc. Even in USD terms, CAGR of Nifty over past 30yrs is close to 5%. This sounds very good.

Now consider the following:

(a)   Nifty witnessed 18 corrections of over 10% in these 30years. These corrections ranged 10 to 60% from the peak level before correction. (See the chart from latest CLSA report below)

If a person had the investment plan period of less than 30yrs, there was a decent chance that he would have made much lower returns. For example, If someone invested in Index ETF in April 1992 (Nifty 1281) and redeemed his investment in September 2001 (Nifty 854), he would have lost over 30% on an nine year investment. Similarly, investment made in Nifty ETF in January 2008 (Nifty 6279) would have yielded just 1.5% CAGR if redeemed in March 2020, a good 12years later.

I appreciate that taking peak and bottom level of indices to state my point may not be appropriate. But it does not change the point. Investment in financial products is not like Karma. One wants to see the outcome of investments over a finite period, usually not as long as 30years.

We do not invest in stocks, with the idea that the profits will come, if not in this birth, may be in next birth; May be I would die before enjoying the fruits of my investment, but my grandchildren will certainly enjoy it. This may be an eventuality. But this is usually not the plan.

Therefore, while investing in an index fund, I must be mindful that only that part of my investment should go in Nifty ETF which I would not be forced to redeem in case of an emergency or contingency, especially if this emergency happens to be a macroeconomic event that might cause a sharp temporary fall in equity prices.

(b)   One must realize that protecting the savings from inflation is one of the primary goals of financial investments. In past 30years (and even in past 10years), India’s average consumer price inflation rate has been above 7%. Adjusted for this Nifty 30yrs CAGR may be under 2%. Does not look glamorous by any imagination!

The short point is that “common” (free) investment advice might be applying the doctrine of Karma to financial investment also. It may be assuming equity investment to be a perpetual endeavour, lasting for generations. Unfortunately, it is not the situation in most cases. People usually invest in stocks for generating some additional income (dividend plus capital gains) in foreseeable future. Their investment plan needs to be prepared accordingly.

I received lots of comments on the yesterday’s post (Investing lessons from down under). Most commentators agreed with my view that a good portfolio must be a balance of consistent compounders and emerging businesses; whereas few expressed strong disagreement. Unsurprisingly, amongst those disagreeing were both types of investors – those who prefer to stick with consistent performers; and those who prefer emerging businesses with a potential of abnormal returns in short to mid-term.

I find myself totally disinclined to argue with any of the commentators, since I strongly believe that investment is essentially a personal endeavour. Each investor will have a different strategy based on his/her personal circumstances, requirements, and aptitude. The widely followed investment strategies are basically templates. Individual investors customize these templates to make an investment strategy most suitable for them.

I however would like to discuss one thing that stuck me hard while reading these comments. I found that most commentators (I believe they all are investors) are not sure about the primary goal of financial investments. Upon enquiry, I received the following answers:

·         Wealth creation (40%)

·         Become rich (25%)

·         Higher profit (25%)

·         Others (10%)

I wonder if these are correct definitions. What I have read in management books is that “goal” of a financial plan must be quantifiable and definite to the extent possible.

·         “Wealth” itself is a vague term. Various people define it in different ways. There are many who even refuse to consider “wealth” as a pure financial term. “Wealth Creation” is even more vague.

·         “Become rich” is even more vague. “Richness” in financial terms, is purely a relative term. It may have entirely different connotation for persons living in Mumbai and Madhubani. This goal is certainly not quantifiable.

·         “Higher Profit” is also a relative term and could be infinite. It could mean higher than alternative avenues of deploying savings. It could also mean higher rate of return than a targeted person or institution.

In my view, the core of investment strategy is to define a definite quantitative goal. Some examples of these goals are as follows:

(i)         Preservation of capital in real terms (inflation adjusted)

(ii)        Return on investment of 10% more than the nominal GDP growth

(iii)       Return of 5% in USD term, since I am saving for my child’s US education

 RBI released the 22^nd edition of its biannual Financial Stability Report (FSR) on Monday, January 11, 2021. The report highlights some key trends that could influence the financial markets in months to come. I note the following red flags raised in the report, which in my view could be relevant to my investment strategy:

Uneven and hesitant recovery, with disconnect in real activity and asset price

Economic activity has begun making a hesitant and uneven recovery from the unprecedented steep decline in the wake of the COVID-19 pandemic. Active intervention by central banks and fiscal authorities has been able to stabilize financial markets but there are risks of spillovers, with macrofinancial implications from disconnect between certain segments of financial markets and real sector activity. In a period of continued uncertainty, this has implications for the banking sector as its balance sheet is linked with corporate and household sector vulnerabilities.

COVID-19 pandemic-induced economic disruptions have exposed some fault lines in global economy. Increased public spending (stimulus) and sharply lower revenue receipts have enlarged the fiscal deficits across geographies, aggravating global debt vulnerabilities.

The credit risk of firms and households has accentuated. This could impact corporate earnings in short term. However, the equity prices continue to reflect strong earnings growth expectations. Developments that lead to re-evaluation of corporate earnings prospects will have significant implications for global flows, going forward.

Capital flows and exchange rate volatility

A hesitant recovery in capital flows to emerging markets (EMs) began in June 2020 and picked up strongly following positive news on COVID-19 vaccines. The response of foreign investors to primary issuances from EMs has been ebullient. Anticipating the COVID-19 vaccine induced economic boost, US yields of intermediate tenors (2– and 5-year) have started edging higher. This could have implications for future portfolio flows to EMs.

EM local currency bond portfolio returns in US$ terms have been lower than local currency as well as hedged returns since early 2020 as emerging market currencies have softened against the US$. This has led to sluggishness in EM local currency bond flows even as global bond markets have been pricing in a prolonged economic slowdown and benign inflationary conditions in Europe and US. In this scenario, any significant reassessment of either growth or inflation prospects, particularly for the US, can be potentially destabilising for EM local currency bond flows and exchange rates.

Improvement in bank asset quality might be misleading

By September 2020, the banking stability indicator (BSI) showed improvement in all its five dimensions (viz., asset quality; profitability; liquidity; efficiency; and soundness) that are considered for assessing the changes in underlying financial conditions and risks relative to their position in March 2020. This improvement reflects the regulatory reliefs and standstills in asset classification mentioned earlier and hence may not reflect the true underlying configuration of risks in various dimensions.

Banks risk losing better quality customers

A sharp decline in money market rates specifically since April 2020, has opened up a significant wedge between the marginal cost of fund based lending rate (MCLR) benchmark of banks and money market rates of corresponding tenor. Expensive bank finance may lead to more credit worthy borrowers with access to money markets shifting away from bank based working capital finance. Such disintermediation of better quality borrowers from banking channels could have implications for banking sector interest income and credit risk.

Banking sector prospects to see marginal changes in 2021

In the latest systemic risk survey (SRS) of October/November 2020 about one third of the respondents opined that the prospects of the Indian banking sector are going to ‘deteriorate marginally’ in the next one year as earnings of the banking industry may be negatively impacted due to slow recovery post lockdown, lower net interest margins, elevated asset quality concerns and a possible increase in provisioning requirements. On the other hand, about one fourth of the respondents felt that the prospects are going to improve marginally.

…stress to come with a lag

Domestically, corporate funding has been cushioned by policy measures and the loan moratorium announced in the face of the pandemic, but stresses would be visible with a lag. This has implications for the banking sector as corporate and banking sector vulnerabilities are interlinked.

Macro stress tests indicate a deterioration in SCBs’ asset quality and capital buffers as regulatory forbearances get wound down.

NPA ratio of banks may see sharp rise

The stress tests indicate that the GNPA ratio of all SCBs may increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario. If the macroeconomic environment worsens into a severe stress scenario, the ratio may escalate to 14.8 per cent. Among the bank groups, PSBs’ GNPA ratio of 9.7 per cent in September 2020 may increase to 16.2 per cent by September 2021 under the baseline scenario; the GNPA ratio of PVBs and FBs may increase from 4.6 per cent and 2.5 per cent to 7.9 per cent and 5.4 per cent, respectively, over the same period.

These GNPA projections are indicative of the possible economic impairment latent in banks’ portfolios, with implications for capital planning. A caveat is in order, though: considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion.

In light of the findings of FSR, the governor of RBI, Shaktikanta Das has cautioned the investors and financial institutions that “The disconnect between certain segments of financial markets and the real economy has been accentuating in recent times, both globally and in India” and “Stretched valuations of financial assets pose risks to financial stability. Banks and financial intermediaries need to be cognisant of these risks and spillovers in an interconnected financial system.

I take note of the above red flags and continue with my “underweight financials” strategy for 2021.

Formulating an investment strategy for investors in India had never been as challenging as it appears today.

For past three decades, the secular growth narrative built on economic reforms, infrastructure development, demographics (large middle class, secular demand growth, accelerated urbanization, educated workforce, etc) and deeper and wider integration of Indian economy into the global economy, made the job of investment strategists easier. All policy failures, inadequacies in terms of physical and social infrastructure, political instability (especially mid 1990s), civil unrest, terrorist violence, geopolitical tensions, and market corrections due to these factors were accepted as “opportunities” to buy a secular long term growth story at a bargain price; and all such adventures were rewarded handsomely by quick reversal in mrket trends.

What you needed to be a successful investor in India, in my view, was the following–

(a)        Courage to take risk.

(b)        Deeper and wider to information.

(c)        Inertia to flow with the current.

(Contrarians who resisted the current and tried to swim against it were mostly annihilated, even though they were right about the unsustainability of the stock prices.)

(d)        Smartness to stay with the industry leaders, rather than spreading your capital too thin.

(e)        All stars favorably aligned in your horoscope.

Alternatively, the ability and resources to manipulate the markets would have also helped you, provided you were not too greedy and exited well in time.

It is pertinent to note that there is no evidence of Indian markets having a rally (or bust) based on their own investment theme in past three decades. Our market has just been passive participants in the global booms and busts (Commodities early 1990s; Financials mid 1990s; ITeS late 1990s; credit fueled construction mid 2000s; financials in mid 2010s, and digitalization of services and healthcare recently. Regardless, the mythology of Indian stock market is full of folklores about how the smart investors have identified the trends and businesses and made fortunes.

The things, however, do not appear to be that simple now. The “secular growth” narrative that drove the markets in past three decades is no longer unchallenged. There is an alternative narrative building. This counter narrative is based on the assumptions like the following:

(i)    India is failing in exploiting its demographic dividend.

(ii)   The pace of infrastructure building is lacking urgency and lags even many smaller emerging economies.

(iii)  The failure to maintain an adequate rate of investment has resulted in insufficient capacities to support the employment for rising youth population.

(iv)   The trend in quality of human capital has reversed due to failure of education and HRD policies.

(v)    A series of poorly planned reforms have diminished the popular appetite for any more radical reforms.

(vi)   The present government is not making sufficient efforts to build socio-political consensus for implementing key reforms to accelerate the growth.

(vii)  The potential growth trajectory of Indian economy has shifted downward to 6-7% and is grossly insufficient to support the rising aspirations of young demography.

The challenge of investment strategy is to find a balance between these narratives by neither getting overwhelmed by the negative narrative nor believing in the “secular growth” story of Indian economy blindly.

In next decade, either Indian equities will either have a theme of their own; or these shall lose the attention of global fund. In past couple of years a tendency to invest in global equities has emerged amongst Indian investors. This tendency may gain momentum in case the Indian economy fails to enhance its potential and realize such enhanced potential. Russia could be a relevant case in point to study in this context.

To support the positive narrative, the following excerpts from a recent Fidelity report could be useful.

“Throughout modern economic history, an expanding manufacturing sector has been essential to boosting employment and incomes. It’s a lesson that’s been driven home repeatedly, by the development of postwar Japan, the export boom in the Asian ‘tiger economies’ and most recently (and emphatically) China’s rise.

…..

India’s fixed asset investment has also lagged China’s and been on a declining trend in the past 10 years. In the 1990s, both countries had FAI at similar levels relative to GDP. Even though China has arguably spent too much on FAI in recent years, such investment is needed in the earlier stages of development and that’s where India missed the boat.

….

Today, India could be at an inflection point in the development of its manufacturing sector, as we think the government’s most recent package of reforms, known as Make in India 2.0, can be a game-changer if executed well.

The plan is to create 100 million manufacturing jobs and increase the manufacturing sector’s contribution to GDP to 25 per cent by 2025 from the current 16 per cent. It also features a doubling of infrastructure spending in the next five years versus the previous five years.

….

Overall, we expect an immediate contribution of around 0.5 percentage points of incremental GDP growth, and eventually the multiplier effects may lead to a contribution of about 2.5 percentage points.

…

Increased investment in infrastructure and manufacturing would also lead to productivity gains per capita. In absolute dollar terms of output per worker, India trails far behind other big developing markets like China and Brazil, not to mention the US or Europe.

With the increase in access to higher education, by 2030 India is expected to have a bigger tertiary-educated population than China. Meanwhile, urbanisation in India is forecast to increase from 35 per cent in 2020 to 43 per cent in 2035.

As a result, income levels in India are rising, as are the number of middle-class and high-income households. This will lead to a corresponding increase in consumer demand, which should translate into deeper penetration of sales of consumer items ranging from white goods to automobiles. Beyond consumer goods, other sectors that stand to gain from an acceleration in structural reforms include financials, industrials and healthcare.

The winners will be those firms that benefit firstly from structural growth, as penetration of their products and services increase in the country, and secondly, those that gain market share from weaker and less efficient players. For example, we expect this to include India’s private sector banks. Besides benefiting from structural growth, they will continue to gain market share from public sector banks due to their strong deposit franchises, conservative underwriting culture, well capitalised and strong balance sheets, and focus on technology.

The growing ranks of young affluent consumers means strong increases in housing demand, which translates into more mortgage business and other forms of consumer credit (not least, credit cards usage).

….

As a key emerging market and a proxy for global risk appetite, India took the full brunt of investor sell-offs when Covid-19 hit in early 2020. Going into 2021, while uncertainties remain, we expect the economy to continue its recovery path.

The recent rally has been narrow, focused on sectors such as healthcare, IT services and materials. Meanwhile valuations remain attractive across a number of areas including financials and industrials. As India’s economy gradually emerges from the Covid shock and corporate earnings start to improve, we think the long-term structural opportunities will again come into focus.”