Invest Today in Tomorrow’s Emerging Themes

In tune with the adage that the early bird gets the worm, investors would do well to identify those themes or sectors that are poised for tremendous growth in the coming days. If, as this report indicates, there is a clear shift towards electrical vehicles or digital technologies, then those are the kinds of sectors you should pay closer attention to. The stocks of these companies would definitely shoot up and give investors long-term benefits 

Nvidia’s stock price has been on a tear lately, leaving many investors wondering if it’s just a hot streak or a sign of something bigger. The technology giant, known for its powerful graphics processing units (GPUs), has seen its share price surge by 757 per cent in the last one and a half years. Though it corrected a bit last week, for a brief period of time the chip-maker became the world’s most valuable company after its share price climbed to an all-time high on June 19. It was worth USD 3.34 trillion. 

To give a context, the GDP of our country at the end of FY24 was around USD 3.7 trillion. The share price of Nvidia has nearly doubled since the start of this year. This surge coincides with a growing global interest in artificial intelligence (AI), with Nvidia’s GPUs playing a crucial role in powering the development and deployment of these advanced technologies. In recent years, it has benefited from a boom in demand for chips that train and run generative AI models, the most well-known of which being OpenAI’s ChatGPT. 

This is not the first time that we are seeing a trend that is dominating the stock market. Remember the dotcom boom of the late 1990s? Companies like Amazon and eBay, then young and disruptive, rode the internet revolution to unimaginable heights. Even in India, we saw a massive increase in the share price of Infosys. Between the start of 1998 and March 2000, before the dotcom busted, the share price of Infosys rose by almost 3,200 per cent or 330 per cent every year. 

Again, we saw a trend between 2004 and 2007 when many infrastructure and realty companies saw a vertical rise in their share price. For example, Unitech Group saw its share price increasing by 614 times between January 2004 and December 2007. More recently, the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) dominated the technology landscape, symbolising the dominance of social media and digital innovation. 

Emerging Themes
The investment landscape is constantly evolving, shaped by powerful forces that drive business cycles and market trends. As an investor with a long-term perspective, understanding and capitalising on these emerging themes can be the key to unlocking significant returns. In the following paragraphs we will take you through a few themes that may play out over the next few years. Building a portfolio out of these themes has the potential to provide outsized returns. 

Manufacturing Sector
India’s manufacturing sector is poised to become a significant driver of economic growth in the coming years. As we navigate through the golden era of development, manufacturing is expected to lead the charge. Several factors point towards this transformation, backed by compelling data and favourable conditions. India’s nominal GDP is set to witness a substantial increase from USD 3,353 billion in FY23 to an estimated USD 7,000 billion by FY30. 

This remarkable two-fold growth rate sets the stage for manufacturing to play a pivotal role in the economy. Notably, the manufacturing gross value added (GVA) is projected to grow from USD 453 billion to USD 1,281 billion, marking an increase of 2.8 times in the same period. Such a significant surge underscores the sector’s potential to not only contribute to GDP but also enhance India’s position in the global manufacturing landscape. 
Source: HDFC MF 

Following table shows how Asian economies saw their manufacturing share growing during this phase of rapid economic growth 

Source: HDFC MF 

Key Enablers
Several factors contribute to the optimistic outlook for India’s manufacturing sector: 

1. Large Consumer Base and Export Opportunities -India’s vast consumer market and growing export potential provide a solid foundation for manufacturing growth. The shift towards a multi-polar world creates new avenues for exporting Indian-made products.
2. Skilled Labour Pool - India boasts a large and skilled labour pool, including a significant number of STEM (science, technology, engineering and math) and English-speaking graduates. This workforce is essential for high-end manufacturing and innovation.
3. Cost Advantages - India offers cost advantages compared to peers, particularly in labour costs. This competitive edge makes Indian manufacturing more attractive to global companies. For example, the monthly labour earnings of an employee in the manufacturing sector in India work out to USD 198 as compared to USD 1,000 in China.
4. Improving Infrastructure - Continuous improvements in infrastructure, supported by substantial capex, are expected to bolster manufacturing. Better roads, ports and logistics networks will facilitate smoother operations and reduce costs.
5. Service Ecosystem - A robust service ecosystem is emerging to support high-end manufacturing. This includes IT services, research and development and financial services, creating a comprehensive environment for manufacturing growth.
6. Focus on Self-Reliance - The Indian government’s focus on self-reliance aims to boost domestic manufacturing. Policies and incentives are being introduced to encourage local production and reduce dependence on imports.
7. Macro-Economic Stability and Geopolitical Factors - India enjoys macro-economic stability and favourable geopolitical conditions, making it an attractive destination for manufacturing investments. 

Companies and Sector To Look For 
Several sectors within manufacturing are poised to drive growth, including chemicals, electrical and electronics, railways, capital goods and industrial machinery. These industries are expected to benefit from the aforementioned factors and contribute significantly to the overall expansion of manufacturing in India. 

Premiumisation
The popular ‘bottom of the pyramid’ (BOP) proposition argues that large companies can make a fortune by selling to poor people. This seems to be now losing the shine in many sectors if not all. For example, more than 70 per cent of the new products launched by India’s largest consumer goods maker Hindustan Unilever in the last two years were in the premium segment. Around 65 per cent of all new personal care product launches were in the premium segment for ITC, doubling the contribution of such products to the division’s sales in the last four years to 38 per cent. 

Also, a new report by Knight Frank, titled ‘India Real Estate: Residential and Office (January - June 2024), reveals a shift in buyer preferences towards premium properties. Homes priced at ₹1 crore and above saw a significant rise in sales, accounting for a substantial 41 per cent of the total sales in the first half of 2024. This is a significant jump from just 30 per cent during the same period of 2023, highlighting a growing desire for luxurious living spaces. 

Source: CBRE (Real Estate Consultancy) 

Key Enablers
What is driving such a shift? As India’s economy grows and disposable incomes rise, more and more people are willing to go deep into their pockets and splurge money on luxury products. According to a recent Goldman Sach’s report, India’s affluent class is expected to nearly double to 100 million people within three years. The confluence of robust economic growth, a stable monetary policy, and substantial credit expansion has significantly augmented purchasing power over the past decade. 

This transformative trend has seen the number of affluent Indians, earning above USD 10,000 per annum, surge from 24 million consumers in 2015 to an impressive 60 million, constituting 4.1 per cent of the population at present, as highlighted in the report. The rising per capita income is changing consumer behaviour towards discretionary spending and now this movement is a lot more towards luxury, as evidenced across products like alcohol beverages, footwear, automobiles and electrical and electronic equipment. In our opinion, this trend is going to continue with an increasing number of apsirational consumers. 

For example, India’s smart phone market registered nominal growth of 1 per cent year-over-year (YoY) in calendar year 2023. Overall, 146 million smart phones were shipped into the country with the second half of the year, registering a growth of 11 per cent YoY, compensating for the sharp 10 per cent decline in the first half. The year also witnessed an increase in the average selling price (ASP) of devices, rising 14 per cent YoY in 2023, reflecting a shift towards premiumisation. 

Similar is the case with Swiss watches, which also indicates premiumisation. The import of these watches swelled 16 per cent to cross a record 2,000 crore in 2023 as more aspirational Indians snapped up luxury timepieces, led by a sharp rise in December. Even in the case of two-wheelers for the financial year ended March 2024, Royal Enfield recorded total sales of 912,732 motorcycles, registering a 9 per cent growth over the corresponding period. The company also recorded a significant 14 per cent growth in the domestic market over the previous financial year. 

Speaking about the performance for March 2024, B Govindarajan, CEO, Royal Enfield, said “We have outgrown the two-wheeler and motorcycle industry in the domestic market. All our motorcycles in the last two years have performed exceedingly well and have grown the market for our brand.” Stocks across various sectors such jewellery, automobiles, consumer durables, hotel and fashion brands are going to benefit out of this trend. 

Technology and Digitisation
In the rapidly evolving landscape of global industries, digitisation stands out as the next compelling investment theme. Emerging technologies across sectors such as industrials, insurance, healthcare, digital infrastructure, retail and supply chain are revolutionising how product or services are delivered. Industrial companies, for instance, are heavily investing in technology to manage, digitalise and automate their physical assets, enhancing efficiency and productivity. 

In the insurance sector, technological advancements are paving the way for the next wave of financial technology (fintech) innovations. Healthcare providers are increasingly adopting digital solutions to boost productivity and improve patient outcomes, reflecting a significant shift towards tech-enabled healthcare. 

As the data indicates, digital infrastructure is set to evolve, supporting these massive requirements. Moreover, trends in artificial intelligence, cloud computing and security are becoming pivotal in enterprise resource planning and human resources. This confluence of technology and industry not only underscores the critical role of digitisation in the future but also highlights the vast investment opportunities it presents. 

Key Enablers
This shift is enabled by the proliferation of affordable smart phones and data plans, which have broken down barriers of time and location. Additionally, a wider gamut of brands and offerings has emerged, further driving digital transformation across various sectors and industries. The following chart shows the opportunities that lie in various industries due to a shift in consumer adoption of digitisation. For example, business process outsourcing (BPC), which is at around USD 2.5 billion in market size, is likely to grow at around 25 per cent till 2030. 

The shift towards digitisation in India presents significant opportunities across various sectors and companies. Businessto-business (B2B) and business-to-consumer (B2C) platforms and marketplaces stand to gain immensely from enhanced connectivity and streamlined operations. Direct-to-consumer (D2C) brands and consumer companies are poised to increase their wallet share by leveraging digital tools to reach and engage customers more effectively. The travel and tourism sector will benefit from improved customer experiences and operational efficiencies through digital solutions. 

Non-lending financial services, such as insurance and asset management, can harness technology for better customer insights and service delivery. Additionally, the fulfilment and express delivery sectors are set to thrive with advancements in logistics technology, ensuring faster and more reliable deliveries. Intermediaries, acting as facilitators in various industries, will also find new avenues for growth by adopting digital platforms that enhance their service offerings and operational capabilities. This wave of digitisation is thus creating a dynamic landscape brimming with investment opportunities and growth potential across multiple sectors. 

Going Green
A green wave is surging through the Indian economy, driven by a global push for sustainability and the urgent need to address climate change. This shift in priorities presents exciting investment opportunities for various sectors. In the mobility sector, for example, a clear transition from internal combustion (IC) engines to electric vehicles (EVs) is underway. This is being fuelled by both mandatory and voluntary factors. 

On the mandatory side, stricter global regulations on emissions and India’s own initiatives like FAME (Faster Adoption and Manufacturing of Electric and Hybrid Vehicles) are pushing the adoption of EVs. Additionally, rapidly declining battery prices are making EVs a more attractive option for consumers, further accelerating the shift towards cleaner transportation. The energy sector is also witnessing a transformation, with a clear move away from fossil fuels and towards renewable sources like solar and wind power. 

Government policies play a crucial role here, with initiatives like setting up large-scale green hydrogen production capacities and promoting battery storage solutions. This focus on renewable energy will not only benefit the environment but also create new business opportunities in manufacturing and infrastructure development. As India strives to achieve its ambitious target of 125 GW of renewable energy capacity by 2030, companies involved in solar PV systems, wind turbines and electrolyser production are poised to benefit significantly. In addition to these companies focused on EV may also benefit out of this shift. 

Emerging Themes: Powerful Allies for Long-Term Investment Success 

Emerging themes can be powerful allies in your long-term investment strategy. By identifying these themes before they reach peak popularity, you gain access to companies poised for explosive growth. These pioneers are often disrupting traditional industries or even creating entirely new ones, offering immense potential returns. However, emerging themes require a long-term perspective. The companies driving these themes need time to develop their technologies, establish dominance, and generate consistent profits. 

A long-term investment approach allows you to ride the wave of growth and fully benefit from the theme’s potential. Furthermore, emerging themes offer diversification benefits. By investing in companies aligned with these themes, you are not solely reliant on established sectors and can mitigate risk while potentially enhancing your overall returns. Of course, challenges exist. Identifying the right themes demands in-depth research and an understanding of technological advancements, industry trends and economic factors. These companies are often young and susceptible to market volatility and unforeseen disruptions. So, how can you leverage emerging themes for long-term success? 

Conduct thorough research. Spread your investments across companies within the chosen theme to reduce risk. Finally, embrace a long-term perspective. Be prepared to weather short-term market fluctuations and stay focused on the theme’s long-term growth potential. By approaching emerging themes strategically and with a well-informed mindset, you can position yourself to capitalise on the transformative forces shaping the future and unlock significant returns on your investments. Remember, the early bird gets the worm, and so identifying trends before they become mainstream is the key in the everevolving world of investment.