India’s GDP has recently been reported to have crossed US$ 4 trillion. India’s growth has been on a fast clip and there are no reasons to believe that this trend will be undermined in any way. It is moot where this will end and there are various estimates of the size of India’s economy in the coming years. There is even a CLSA estimate that projects that India will become the world’s largest economy surpassing the US. This estimate puts India’s GDP at US$ 45 trillion by 2052.
The private sector will almost certainly be among the primary drivers of this growth. They will benefit from both growth in consumption and investment. Currently there are only 2 Indian companies in the top global 100 companies. If India becomes the largest economy in the world, then this number will increase exponentially. At the moment the two largest economies in the world account for half of the top companies in the world. So India has a lot of catching up to do.
In the coming years and decades, India will spawn many companies which are global in scale and scope. Investors who can identify and invest in such companies will be handsomely rewarded. The issue is to identify the stocks that will benefit from these trends and outperform the market.
It is easier to identify the sectors that benefit from these trends than the individual stocks.
The rise in income levels and increasing prosperity will bring a rising number of people into the healthcare and insurance sector. The rise in global warming will result in the rise of the renewable energy sector. India’s expertise and leading edge in the IT sector will continue to remain intact and this sector will benefit from the new trends emerging in the technology sector.
India’s projected growth rates will pull large swathes of population out of poverty and will lead to a growing middle class. This will lead to a rising demand in basic consumption or the “roti kapda aur makaan” play. Consequently, the real estate sector and the fast moving consumer goods or FMCG sector will also do well.
These are the conventional views on India’s growth story and the sectors that are likely to benefit. Now identifying companies within these sectors that will really benefit from this growth is a lot more difficult. Sectors are influenced by broad macro themes which tend to be relatively stable.
Individual companies are subject to far more intricate and complex factors. Apart from the broad underlying theme, there are far more variables, like the size of the company, quality of management, strategic vision and execution abilities. Though subject to considerable tail winds by being in the right sector, instances of companies underperforming in the best of sectors is too common to enumerate. So it is not very difficult to be in the right sector but in the wrong stock.
One of the ways in which to identify outperforming stocks is to do a momentum analysis of the stocks in any one sector. Momentum is easy to understand. It is often used interchangeably with speed. In the stock market it denotes the rate of change in the price of a stock. A stock that is in trend demonstrates price persistence and tendency to continue to move in its present direction. Momentum investing seeks to exploit this phenomenon in the markets.
While there is a misconception among many investors that momentum is short term in nature may be consigned to the arcane confines of intra day trading or perhaps overnight trading, nothing can be further from the truth. Momentum like many technical stock market phenomenon persists across different time lengths and time scales.
In our lab testing we have found momentum to last in some cases for more than a decade. In one such instance, we found a trend and the accompanying momentum of HCL Technologies to last for over 14 years from 2009 to the present. During this period, the stock generated a return of 13x which amounts to a cagr of 20%.
Emerging sectors by definition have momentum. They are what are called green shoots being new young and fresh. In most instances, metrics commonly used to gauge value do not apply to emerging sectors. They are the growth stories that will become value plays in the future. One can therefore use conventional valuation metrics then. Till then the best way to play the emerging or the growth sector is through momentum.