The India growth story – The takeaway for investors
The underflow of changes in the Indian economy in the post-pandemic world has made one thing abundantly clear – that the India growth story isn’t going to lose its charm any time soon: rather it has all the makings of a magnum opus. As the country is expected to clock a double digit growth in 2021 which is significantly better than what experts had predicted when the outbreak of the coronavirus pandemic wrecked havoc on the global economy last year, investment patterns are bound to witness a paradigm shift.
Gautam Srinivasan continues his discussion with Maneesh Dangi, CIO of Fixed Income at Aditya Birla Sun Life, to get a comprehensive picture of how the winds of change will impact the domestic investments.
The winners and the others
Change is the only constant and what with the recent pandemic having thrown lives out of gear, the impact on various industries in India has been varied but what is common is that it has heralded an era of transformation for all of them. Dangi describes, “India is so undercapacitated that anything that you think of there is opportunity almost everywhere. From a macro framework standpoint, I think, India is likely to witness a massive growth in sectors like home building or other construction businesses. .. Logistics, supply chain will also do very well. That is in my view at this stage of development is pivotal to us achieving a reasonable growth. We are not a frontier economy. We are a relatively low to middle income economy and we must ensure that capital which is extremely scarce that should be deployed in areas where we have low hanging fruits because if you put lot of capital in the frontier economy you will get only 2 percent growth but we can easily achieve as China has been able to demonstrate 7-9 percent growth. Construction is an area- per capita constructed area in India is super low and therefore associated industries such as steel, cement will do very well.”
Dangi adds, “I think we are not far behind from most developed countries in terms of digital infrastructure and it is relative to our developmental markers. From an industries point of view, that business will continue to do well. Our stature as office of the world and pharmacy of the world will do well and grow in next 10-15 years.”
But the future path for many industries which are witnessing an unprecedented level of disruption may make things challenging. “What will not do well – some of the industries that will get disrupted because of the advent of new technologies – for instance finance, education, brick and mortar healthcare the way we see them, energy – carbon-based and oil-based industries could struggle. Those in ICE (internal combustion engine) businesses would struggle as I would imagine that by 2040-2050 there would be no ICE vehicles on Indian roads.” For the auto industry players Dangi feels it is too early to predict which of them would become formidable manufacturers of Electric Vehicles and what with EV businesses being very different from ICE, it isn’t pre-ordained as to who would succeed.
The implications for the Indian investor
Dangi is of the conviction that the stage is set for India to grow at 7-8 percent for the next ten years. “7-8 percent will mean 11-12 percent nominal growth. Typically, such strong economy is a reasonable condition for stock markets to do very well and typically equities tend to do well in settings such as these where the economy is expanding rapidly.”
However, it is upto the investors to gauge their level of risk-taking abilities. “Investors would know there are inherent risks to allocating capital in equities as they tend to be more volatile, more drawdown all of a sudden that you as of today cannot surmise. Risk allocation to equity vs fixed income vs real estate has to be taken care of and there is no big picture number I can give to anyone. Everyone has to determine what his /her risk appetite is. But undoubtedly it is the best to participate in India’s growth story by investing in equity markets.”
Buying real estate and allocating monetary resources towards fixed income funds is also beneficial, he explains. “We have a lot of young people in the country who will continue earning a steady stream of income over the next few years. They should look at 5-7 percent real return on their portfolio which is inflation plus 5-7 percent. Everyone must buy a house because real estate is cheap now and interest rates are too cheap and it will take care of your inflation and will earn better than fixed income and vis-a-vis fixed income funds and it’s a good collateral also. For your regular needs, you should have some fixed income funds which will earn you 1-2 percent.”
Evolution in investment patterns
The digital revolution has also led to a drastic shift in the way retail investors participate in the markets. One tap of a button is the gateway to the financial world and according to Dangi this has engendered a culture where more and more people are embracing equity as a legitimate asset class.
Dangi quips, “This is part of general evolution of every economy – as the country gets rich, a substantial part of the population starts looking for opportunities that are beyond routine and the routine is fixed deposit, fixed income funds and real estate. Older generation would think of equities as lottery and which could make some people super rich but most people would lose money was the general perception. But that’s not true. So this rise in equity culture – it is not a top down thing with the govt telling people to invest – its bottom up with more people realizing they have enough savings. Somewhere between 2010 and 2015 India got to a point where we already had a little bit of a equity cult building. India has had an ecosystem of investing since long but that’s primarily and ecosystem of H&Is but since last 5-6 years relatively middle income demographic also participating through SIPs which is a great idea of investing slowly and steadily so that wrinkles in the market can be gotten over with.”
Typically many investors still harbour cynical sentiments about equity investments because of the volatility factor. Dangi assures that for long-term investments, investors have nothing to fear from market fluctuations. “There is no volatility in equity if you are investing for 5-10 years. I think a very large part of your allocation you should bet on equities. It is inappropriate to talk of specific opportunities in market because I want people to be aware that these themes keep changing. I am very confident that Indian equities will do very well over all. It is best to allocate money in funds which invest in all sorts of things – that’s a better approach for the audience. For a broader audience, the opportunity is for you to participate in the India growth story by betting on Indian markets.”