4 themes that can help you gain from long-term market rally

The Indian stock indices have been hitting new all-time highs, leading to a belief that the domestic market is on a secular uptrend. Unfortunately, very few Indians actually stand to benefit from this rise, as the proportion of retail investors investing directly in the equity market is strikingly low at 1.8 per cent.

Even if we include managed funds, like mutual funds, pension funds and insurance plans, this figure will not exceed 4.5 per cent. Although ‘volatility’ is cited as a key reason for the reluctance of retail investors to invest in equities, data points over the past two decades clearly show that the Sensex has given a CAGR of 14 per cent over the years. This return is far higher than any comparable investment instrument like bank fixed deposits, gold or real estate.

The concept of inflation-adjusted return is yet to get gain popularity among the burgeoning middle class – a core component of the Great Indian Consumption story, which is supposed to pan out over the next decade or so. Therefore, it is imperative to improve financial literacy so that more Indians can participate in the wealth creation possibility that India has to offer.

While most investors have celebrated the current liquidity-driven rally, some are wary whether this trend will continue or of they may an imminent crash in the market like the one witnessed in 2007-08.

The more important concern is whether there would still be an opportunity wherein they can invest even at current levels.

We believe the present market uptrend should continue in the long term, as India’s fundamentals and macros continue to improve on account of (i) strong reform focus of the government (ii) government’s continued emphasis on reviving the manufacturing sector through structural measures (iii) benign interest rates (iv) revival in rural consumption on the back of good monsoon, and (v) 7th Pay Commission payouts giving a fillip to consumption-led growth.

The improvement in the country’s fundamentals is visible in most high-frequency indicators such as manufacturing and service PMI readings and IIP.

As the benefits of the reforms announced percolate to the ground, consumption will improve on the ground and there would be a noticeable improvement in corporate fundamentals.

Three main indicators of improving corporate earnings and risk appetite would be (i) credit offtake (ii) capacity utilisation, and (iii) further capex expansion.

All these factors are at a multi-year low and would unfold slowly in the coming months. This makes India an attractive investment destination, not just for domestic investors, but also for foreign institutions.

Another crucial factor supporting the upward trend while fundamentals catch up, is the constant inflow of liquidity. Liquidity levels are continuously improving in the market. On the domestic front, liquidity is high, both with mutual funds as well as the insurance companies. For instance, the quantum of SIPs coming into mutual funds stood at Rs 4,500 crore and all of this is being invested in the market. FIIs, too, have been focusing on India, given its attractive fundamentals and expectations. Although there are months wherein FIIs have pulled out funds on account of global events, DII flows have supported the market. We expect this trend to continue and the flows to remain strong from a long-term perspective.

So, what are investment themes you can explore at the current levels of the market?

A few themes one can look at are a) consumption led by an improvement in real urban wages and revival in rural consumption; b) agriculture related sectors given the focus of the government in improving both productivity as well as growth; c) infrastructure and d) affordable housing.

Consumption
One of the biggest drivers for India’s domestic story is the growth in consumption on the back of steady growth of urbanisation; growing young & working population; increasing penetration of mobile technology and internet infrastructure; rising aspirations & affordability; the government‘s focus on skill development, job creation, infrastructure, manufacturing, and investments; factors such as financial inclusion initiatives and direct transfer of subsidies. Real average household incomes have been rising.

On the urban side, real urban disposable income has remained stable particularly as inflation has ebbed. On the rural side too, easing inflation in addition to better farm output has led to improvement in real wages.

These factors support the consumption story. So investors could look at consumption related sectors such as auto, retail, FMCG and textiles.

Agriculture-linked stocks
Investors can also look at the agriculture space. Two things would be driving growth in this space; first is, of course a relatively normal rainfall, which can be a major driver. We have already seen a pickup in crop acreage as well as sowing which has helped most of the agrochemical companies.

The second driver could be the better government focus on rural India. Essentially, it leads to larger cash in the hands of farmers which can lead to a pickup in spending.

Infrastructure
With the kind of focus that the government has put on the infrastructure sector, it is a good space to invest in. The government has increased infrastructure spending to offset lower investment from private players. Roads, railways and power T&D are three key sectors that should witness higher spending over the next 2-3 years. Other niche segments that should do well are water, irrigation and metro rail. With orders coming in, though at a slower pace, and execution picking up within the economy, this is a sector that we are quite positive on. While investing, one should look at players who have been getting orders and also have a strong balance sheet to execute these orders.

Affordable housing
The government focus on affordable housing will not only provide a boost to the real estate companies in the segment but also to the 70+ industries that are directly or indirectly dependent on affordable housing, such as housing finance and ceramic tiles.

Of course, I would recommend to go stock-specific and keep valuations in mind. Whenever there is a good dip in prices, valuations become attractive and present good buying opportunity.

Happy investing!