The election outcome has fired the markets, what do you see happening a year or two down the line?
One is hopeful that you will see a full market and economic cycle revival. Markets and the economy have gone through six-seven years of consolidation or we can even say depression. People haven't really added capacities on the ground in the past five years.
Our rate of consumption keeps on increasing and we are likely to see shortages in a lot of products going forward and essential purchases are being postponed. We have already seen a slowdown in fast moving consumer goods (FMCG) sector and there is sharp deceleration in the automobile sector. Today we are at point where a recovery looks likely to commence once the new government revives confidence.
The key is whether we grow GDP fast enough to get rise in real per capita income. The fact of the matter is that over the last five years, our real per capita income has got deflated. While in 2003-2007 we were growing without inflation and the Rupee was also strong, our per capita income rose sharply. During that period everything from housing to consumer and autos took-off. What we have done in the past five year is followed a 'Robin Hood' strategy where the government takes money from the rich and gives it to the poor. You can't have re-distribution of wealth when the country is not wealthy. At $1,200-1,500 per capita income, we can't talk of re-distribution entitlements. I think its misguided policy which has taken us backwards.
This is the reason why the world is so focused on Indian elections. Hopefully we might move from the left side of the policy spectrum (socialism) to the right side (capitalism). If we focus on growth of per capita incomes and not just GDP growth, and if we reach a mark of $5,000 per capita income in the next ten years, there will be explosion in demand and the whole structural case for India will get revived. One is assuming that the National Democratic Alliance (NDA) will come to power and usher in economically sensible and mature policies. If we don't get that, then we will be back at the tortoise rate of growth in India. We need to create 25-30 million jobs in India every year and that demographic dividend can turn into nightmare if we don't do things the right way, urgently.
What is your medium-term judgment on the valuations of Indian stocks in the backdrop of the elections and the markets?
There are few segments of the markets like consumer stocks which are extremely expensive while commodity related stocks are under depression. This market throws an opportunity based on each person's aptitude as to where he wants to fish. Many investors are holding on to their investments into less sensitive stocks as there is no major risk there.
On the other hand, professional investors and mutual fund managers have started building positions on cyclicals where there is maximum scope of appreciation. Its up to each individual to judge where he wants to invest in such a market.
I personally believe that any investor should have a balanced portfolio. For example now FMCG looks expensive but investors should have them on their radar and invest once there is some correction. Otherwise, today TMT and pharma looks extremely compelling and is throwing interesting opportunity. Some of the cyclicals like Auto sector can witness compound growth of 20-25 per cent going forward.
I believe Financials will always be cyclical; one can buy them at 1.5 times their book value and hope that, it grows at 2.5 times the book and you can make some wealth. It's all on valuations, but we should have a balanced portfolio at all times, one can change the weightage according to their temperament and trade-offs available in the market.
Which sectors and industries do you see as being most politics proof?
It's hard to say because the law can change economics of many businesses. For example consumer stocks are considered as 'simple investments in India and that's the reason they are priced so high. I would also include some pharma and IT names as relatively immune. However, the other two segments of TMT; telecom and media are suffering.
Telecom was a great sector and we muddled it up with wrong policies. But with data revolution, I think telecom as a sector should come back if we get the license and policy regime right. Media, where India is a big supplier of content to the world and a large consumer is mired in problems on the distribution side of the business. But things are turning out to be positive in Media sector. I believe TMT should be important component of individual portfolio.
In financial services, public sector banks are seen as fighting with their hands tied behind their backs and therefore private sector banks have run far ahead. I think that trend will continue to play out because you will find more and more talent being brought in by the private sector. Even, non-banking financial companies (NBFCs) and credit rating agencies have done well; investors can chose from that sector.
I suspect that at some point of time, even insurance companies and asset management companies will come to market, so financials are already more than a quarter of our market and they will remain important in anyone's portfolio.
The last segment is capital goods, commodities and manufacturing which largely depend on government policies. They also have their own growth cycle and it can create massive wealth. As we are aware that, in the last cycle, stocks like Reliance Industries and Vedanta had exponential growth in their period and were well run companies. However, for the average investor; Consumer, Pharma, TMT and Financial Services should form the core - of at least 80 per cent. Engineering, manufacturing and commodities can be cyclical plays from time to time.
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