A year ago, the global markets were clearly in a state of liquidity driven euphoria (stocks, tech,cryptos, start-ups). Had someone told us then that in the next 12 months the US stock markets would fall 30%, crude oil would rise to $100, the start-up & crypto world would be badly bruised, and that Europe’s mindless ESG drive would be punctured – we would have gladly agreed with them. But had the same person told me that in midst of the above chaos, India would not only remain an island of calm but also emerge stronger, we would have taken it with a big pinch of salt!
Large import of oil, gas, gold & electronics has been the primary reason for India’s negative trade balance i.e., our total imports have always been higher than total exports. Historically, this situation gets aggravated when foreign investors sell their India holdings in large quantities and remit money
back to their home country. Hence, we have always witnessed violent corrections in our stock market, currency market and interest rates during global turbulence (1998, 2000, 2008, 2013, 2020).
But this time around, Indian stocks, bonds and currency have been remarkably stable. That brings us two very logical questions – 1) Is this stability a temporary phenomenon & is there a big fall lurking? And 2) Is this something durable and signifies a permanent improvement in India’s outlook? While only time can answer these questions with certainty, the data points emanating over past few quarters point to the latter i.e. permanent improvement in India’s outlook. Let’s delve a little more into these to understand the opportunities that can arise and the safeguards that are needed, should the thesis not work out.
Observation 1: Stable geopolitical situation!
Globalization got fractured over last two years when US & Europe tried to weaponize its payment systems (SWIFT) against Russia, China tried to weaponize its manufacturing dominance, Russia tried to weaponize its energy dominance over Europe and so on. India has largely stayed neutral and offered itself as an alternative manufacturing destination to all the MNCs that are overly dependent on China or Europe for sourcing.
This offer has been backed with meticulous preparation like PLI schemes, tax incentives, reduced red tape, easier land acquisition, labour reforms, atmanirbhar criterion for PSUs, etc. It is getting clear that if the last decade belonged to consumer, banking & technology, the current decade may
witness a boom in India’s manufacturing economy.
Observation 2: Low leverage, large domestic economy, and booming software exports!
India’s financial system witnessed multiple rounds of clean-up just before COVID (De-mon, GST, IBC,IL&FS). Also, unlike the west, the Indian Government did not indulge in a massive spending spree during COVID. Hence, the financial health of our banks, corporates, and central government is very strong. Also, thanks to our blessed agri resources, we are not overly dependent on the world for food. The steadily growing software & engineering exports have so far managed to offset the oil imports bill. All these factors are big contributors to India’s macro stability. Flare up in oil prices probably remains the only big risk to India story.
What are the implications for investors?
The blessed part about investing in India is that there is a natural growth embedded in our economy,thanks to the captive consumption of the large population and rule of law. Our delivered growthrates may be lower or higher than our real potential, but we are surely growing. In such an economy, we don’t have to rely much on complicated macro assessment to guide our investment decisions. We need to find few good pockets of opportunities, few good promoters and stay invested till the thesis is intact.
While the evergreen themes like travel, fashion, food, finance, lifestyle, and technology continue to remain good areas to invest, one must start paying attention to the energy transition &
manufacturing theme. India is trying hard to reduce its oil import as well as meet emission targets through various strategies.
Oil dependence can be reduced through ethanol blending, increased use of Electric and CNG vehicles. Creating infrastructure for these technologies would entail a lot of work for companies like Praj Industries, ISGEC, Alicon, Motherson Wire, Hitachi Energy, Ingersoll, Kirloskar Pneumatic, IGL, Techno Electric, Voltamp, BBL, Power Grid, etc.
Factory operations can be made more energy efficient through use of advanced boiler technologies and better rated components like motors, pumps and compressors. Factory affluents can be treated in FGD or ZLD unit before being discharged. There are dozens of companies that work in these areas.
If India can attract global players to manufacture in India, we will see a boom in construction of new factories. Most of the factories would require foundry, CNC machines, motors,pumps, compressors, bearings, steel, automation, logistic & warehousing services, etc.
Indian markets delivered ~11% CAGR over the last decade despite being plagued with scams & NPAs under the UPA; disruptive reforms like IBC, GST, NPCI under the NDA. We are now at a juncture where we will possibly enjoy the fruits of the pain taken over last decade. As such, long term investors can use globally induced corrections (there will be a few of them in the next twelve months) as opportunity to deploy more money.
Trivia – Corporate ESG v/s Personal ESG!
Environmental, Social, and Governance (ESG) has become a buzz word for nations, corporates, and investors over the last decade. So much that larger portion of company’s annual report or presentation is dedicated to ESG & CSR efforts in comparison to the business performance & initiatives. This talk is supplemented by the increased promotion of everything being clean, green, and responsible – clothes, cosmetics, energy, furniture, packaging, food, etc. The non-stop chanting may tempt you to believe that world is going in the right direction and mother earth has a chance to fight back.
The more we try to look beyond these clean and green claims, the more we realize that ESG is less about the environment and more about killing the guilt of excess consumption and spurring growth
for new industries like EV, Renewable, Home electronics, Fast Fashion, etc. The peak of ESG madness was revealed last month when one of our portfolio companies declared “we have sold a record number of pumps to biogas plants in Germany”. On further inquiry, we learnt that electricity generated from biogas has a high level of ESG compliance in Europe; the unfortunate part is that they are chopping off the forests to secure wood for these biogas plants!
The West has always paid lip service to environment & ecology. As India witnesses a manufacturing & consumption boom over the next decade, we hope we learn from our extant ancient ESG wisdom, most famously described by the two Sanskrit words “Vasudhaiva Kutumbakam” i.e. the whole world is a family. The ‘recycle’ part of ESG should hopefully generate a lot of interest in the coming decade. Currently, there are only a few companies that are into recycling of tyres, metal scrap, plastic bottles, car batteries and e-waste. If commodity prices stay high for long enough, this sector will see a lot of traction.
The reduce & reuse part of ESG is more of a personal choice for most of us. Just like the CEO of Fairphone mobiles once said, “the most sustainable phone available is the one you already own”, we too have a positive bias towards these aspects. Not owning an additional property, car, credit card,
memberships, etc has not only freed-up much of my mental bandwidth but also enhanced our health & wealth situation.