Investment opportunities in 2017

Investment opportunities in 2017

2016 would be remembered for many landmark events which would significantly alter future course of investments. We tend to look at medium to long term potential of any investment idea while investing and tend to differentiate from the short term noise which might be there at the very moment.

Technically, attractiveness of investment is combination of growth prospects, capital efficiency and valuations ascribed.

Current correction has two legs

One argument is that India is more dependent on cash (proportion of sales; expenditures fulfilled in cash is higher) and demonetisation would take a toll on these sales. Here, very high growth assumption underlying the high valuations is tested for near term. Secondly, as demonetisation would lead to disruption of the unorganised section, the organised section may see strong positive boost.

By very nature of these two forces, first has immediate impact, whereas, second has slightly back ended or at best has mid-term impact if not a long term one.

Equity investment being a long term product, actually such disruption is good to have to weed out the weak from the system. Such weeding leads to surviving players reemerging as stronger.

Many sectors would see shift from unorganised fragmented businesses to organised consolidated businesses capable of dealing with future technological shifts, disruptions in a better manner.

Meanwhile, investors would continue reassessing expectations of these businesses and few stocks may still see sharp corrections.

Consumption sector

India’s long term thesis is intact or in fact getting even more attractive due to the government’s moves towards ease of doing business and bringing best out of organised sectors of the economy.

We believe for 2017 that those sectors which have been punished extensively by market would provide better risk-reward potential.

The idea here is not to bank on the mean reversion of multiples but understanding the true worth of the business and bank on long term fundamentals of the sectors and stocks.

We follow bottom up based valuation methodology and have realised over time that the industry is not the final destiny of the stock; in fact one may find highly rewarding stocks in a sector which is undergoing through disruption.

India is undergoing through metamorphosis – the way Indians spend which is underlying of majority of sectors is changing. As analysts may put – Indians spending pattern is going through fundamental shift towards discretionary spending. Share of wallet of discretionary items is expanding at the cost of staples.

Services like education, entertainment, communication, which are aspirational in nature are occupying more space in the wallet. We believe these sectors would be best placed to create value not only in 2017 but for next few years. If we look at aviation traffic growth and premium bike sales, these numbers are a tip of the iceberg of what is underlying in real economy.

At the same time, bottom of the pyramid is transforming – media’s far flung reach in the nook and corners of the nation has created strong aspirational mindset in the minds of consumers. Those who are still consuming products from the unorganised section of the industry are asking for branded consumer products. Upcoming GST framework, where organised section is expected to benefit immensely (at the cost of tax-avoiding businesses), is expected to propel this shift towards organised section.
In areas where fragmentation is high — e.g. luggage industry, entry-level consumer goods, are likely to see sharp jump of market shares in favour of organised sectors. These sectors would provide fantastic investment opportunities in years to come.

Industrial and Banking and Financial sector:

Finally, the industrial and banking sector cannot remain aloof from this growth for long. Growing India requires strong backbone of the banking and financial industry.

Insurance domain is in nascent stages in our country. Now, post-demonetisation it would not be surprising if our well banked society opts for the insurance services and provides a good value generation opportunity for multiple years. Once current capacities on industrial side are occupied, new capex cycle would start paving way for further opportunities in capital goods. Infrastructure will get a boost going forward. The National Highway Authority of India was constructing 2.4-lane km per day before the present government came into the picture. The latest data from NHAI indicates that it is executing nearly 26-lane km/ day. Infrastructure and construction-related stocks may get better in coming days.

(The writer is CIO at LIC MF)

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