Moving Forward And Fast

Over the past decade, the Indian economy has transformed itself into one of the fastest growing economies in the world, bringing about a paradigm shift in both our financial and capital markets. Today, any intelligent investor has a plethora of investment avenues at his disposal, including gold, real estate, and equity. Gold is currently attracting a lot of interest, primarily because it is trading at an all-time high of USD 1,430 per ounce. Yet, I do not believe that gold is a strong asset class as it has been unable to deliver any substantial returns over a long period of time (delivered a CAGR of a mere 5.8 per cent in dollar terms from 1990 to date).

As regards real estate, I firmly believe that this should form an important part of an investor’s core portfolio, as its true value lies in its inherent social security and the fact that real estate acts as a natural inflation hedge. Equity, on the other hand, as an asset class, has outperformed all the others over the long term and has created significant wealth for investors through capital appreciation as well as consistent dividend returns (The Sensex has delivered a CAGR of 18.2 per cent from 1990 to date, excluding dividends). After hitting 8,000 (in 2009) in the aftermath of the global financial crisis, the Sensex has rebounded and maintained its upward trajectory in 2010.

While the markets have come off from their recent highs of 21,000 in 2010, I believe that the Indian equities are well-poised to deliver strong returns in years to come, on the back of strong fundamentals in place, which will continue to attract global liquidity. However, there are still concerns on a full-blown recovery for the developed world, which so far has been growing on the back of innovation. Developing economies like India can easily sustain an 8-9 per cent growth due to the huge disparity that exists between the developed and the developing economies coupled with favorable demographics, high domestic savings, a scope for rapid productivity improvement, and sustained policy reforms.

Incidentally, in India our per capita productivity (per capita income) is so low that we can grow at 8 per cent per annum by merely borrowing innovation already achieved in developed economies and increasing the level of investment and consumption in our economy. The strong prospects on the economic front has been reflected in the impressive inflow towards the Indian equity markets. The attractiveness of India as an investment destination can be gauged by the fact that in the tough macro environment period of 2009, India was a recipient of USD 18 billion and has already witnessed new record inflows of USD 29 billion in 2010 so far.

Going forward, while the global recovery is underway, the emerging markets as an asset class would continue to outperform, as these economies would be at the forefront of the global growth in the years to come. In this context, India is one of the fastest growing economies across the world. Structurally, India has all the levers in the form of favourable demographics, high savings, and investments, which would play out in the future, thereby resulting in India sustaining its high growth and even moving up higher in the growth orbit. Thus, India, on the strength of its high long-term growth and profitability prospects, would continue to remain a preferred investment destination.

Thus, given the overall prospects, the emerging economies would seldom be available at throw-away valuations, and would trade mostly near their fair valuations or at premium to the fair valuations. Given the backdrop, the Indian equities, though trading at long-term averages of 16x on one-year forward earnings, still throw up opportunities for investors to earn healthy returns both in the large-cap as well as the mid and small-cap space. The key themes that align to the structural shift happening in India are infrastructure and banking. Banking is a secular theme riding the growth in the economic activity, wherein the private sector banks are public sector, the space has witnessed an increased participation from the private sector, thus benefiting the companies in the space.[PAGE BREAK]

Further, though the companies in the sector have underperformed the poised to grow faster than the overall industry. An 8-9 per cent GDP growth will entail the banking industry to grow at 18-20 per cent, higher than the overall Sensex earnings growth, with private banks growing well above that. Thus, the sector is well-poised to remain an outperformer, with private banking companies posting significant outperformances. Infrastructure spend, which is expected to double during the next five years, would be one of the key drivers for India’s economic growth. Though earlier restricted to the broader indices, the healthy order book-to-sales bodes well for the growth of the industry and thus at the current valuations provide good risk-reward opportunities. Another investment opportunity that will play out is in the capital goods space. If we look around, most of the sectors such as auto, steel, etc are operating at the upper end of the capacity utilisation, which augurs well for the capital goods sector. Apart from these, I strongly believe that the export oriented sectors would continue to do well, given the advantages in terms of the cost of manufacturing and high skill-sets available, which will aid India to enhance its exports-to-GDP in line with the trend witnessed by its peers.

The transformation of the developing to developed economies has witnessed exports-to-GDP moving up from 20 per cent to around 40 per cent of the GDP. With India’s export to-GDP at around 20 per cent, there is ample scope for the same to improve. Therefore the export-oriented sectors like pharma, IT, and auto ancillaries would continue to do well, though a stock-specific strategy will be preferred at the current juncture, given the strong run-up already witnessed by these sectors. To conclude, I believe that India and consequently the Indian equities are perfectly set for a continued uptrend and provide investors ample opportunities to ride the structural transformation.