Factors that determine high growth sectors
As our economy grows at a healthy rate, year on year, what is happening is that the ‘ per capita’ money available is increasing rapidly. In nominal terms, if our GDP is growing at seven per cent and we have inflation of five per cent, the corporate India numbers should grow by around 12 per cent, on an average. Now, the important thing to figure out is which are the areas or sectors that will grow ‘ above’ average and which will grow ‘ below’ average. This will help us in our investment decisions.
GDP growth is never uniform across the population. It is the natural order of things that the disparity will keep getting higher and higher. Governments try and redistribute something through taxation and subsidies, but it is never enough.
The top five per cent or so will get more than half the growth that happens. This segment, by itself is a large number. Five per cent means nearly seven to eight crore people or nearly two crore families. This segment is focused on high end consumption and will drive that part of industry which is highly aspirational and less sensitive to price. It also pushes the demand for financial assets as well as real assets. In value terms, the growth here is probably the most significant as this segment drives the high profit margin industries. Luxury goods, upper end housing, financial assets are the ones that will get their incremental money.
The interesting thing happens at the bottom of the market — 95 per cent of the populace. As each one gets included in the system, access to finance becomes ever increasing. The government spread on infrastructure, creates its own demand. If electrification reaches every corner, it will spur a huge demand for electrical appliances. As roads become better, demand for services increase and mobility of labour gets better.
Consumer spend shifts progressively from low priced unbranded produce to higher priced, branded goods. Aspiration is the key word. The spread of media and telecom in India has ensured that aspirations are very high.
One of the key drivers of demand is the easy availability of money. And whatever one may say about Aadhaar, the fact is that it makes lending decisions easier for the automated lender. Today, most finance companies talk about a ‘ one- minute’ approval process! Digital technology is changing the insides of every industry. Consumer spending will lead the economy and it gets leveraged with money from banks and finance companies.
Where will people spend? Obviously on white goods, FMCG produce, vehicles and food will be the main beneficiaries. Infrastructure spend could accelerate, but it will not be a secular growth. It may last for two to five years before it slows down. Healthcare is a big growth area — not just pharma but also hospitals, diagnostic centres.
Entertainment, communication and e- commerce will expand big time, but will give very limited opportunities for the common investor. Most financing will come from private equity. I would rather try and find out which are the products that will gain by this explosion of market expansion and see rewards there.
Housing will grow. The way to play that would be to bet on building materials and home finance. Both are generally in focus and look expensive, but if there are corrections, this is a good space to get in to. Packaged food products will increase their penetration. Maybe buying the packaging equipment and packing materials would be growth sectors.
Cyclicals and commodities have their place. Most have seen dramatic recoveries in bottom lines and they will present buying space in the next cycle, perhaps. For now, is best to look elsewhere.
Markets are in a wobbly phase. So I would take my time, do some homework and keep my shopping list handy. And this is a good time to put a price against which I will be happy buying. Just wait for it. If it is confusing, then best to stick to SIPs in index funds.
The writer is a veteran investment advisor. He can be reached at balakrishnanr@ gmail. com