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India's economic landscape is a vibrant tapestry woven from diverse sectors, each with its own rhythm and rhyme. I'm often asked: where are these sectors in their business cycle? Understanding this cyclical nature is crucial for making informed investment decisions. Let's dive into the current state of some key sectors:
1. Early recovery: A time for cyclical plays
- The Indian economy is widely considered to be in an early recovery phase. This translates to:
- Low inventories: Perhaps learning from the mistakes of the euphoric 2007/08 time, businesses are cautious, leading to lean inventory levels. This can change quickly as demand picks up.
- High inflation: Rising input costs and global factors are pushing inflation upwards. This can benefit sectors like commodities and energy.
- Rising interest rates: High debt in US & Europe, post covid economic slowdown, current geopolitical issues of ongoing wars and with China slowing down, all these factors have disturbed supply chains, causing high inflation and leading to high interest rates. This can impact interest-rate sensitive sectors like real estate & capital goods manufacturers.
In this environment, let us look at these cyclical sectors.
- Financials: Banks have gained tremendously from decades of low NPAs coupled with rising interest rates. India is in a classical sweet spot as for the first time since Independence, both banks and corporates have healthy balance sheets and banks can gain smartly by riding the expected improving credit demand.
- Automobiles: Pent-up demand and new launches can drive growth, though rising interest rates are a challenge now and once the interest rates start sliding down, it can fuel good demand for vehicles
- Capital Goods: Currently, the majority of Capex is coming through government spending. Further, private sectors' increased capex spending and industrial activity can boost this sector.
- Metals & Mining: Rising commodity prices bode well for these sectors. Also, the government’s positive approach to mining activities; with an objective to lower import dependency, can be immensely helpful.
2. Holding steady: Defensive sectors provide stability
Some sectors are less susceptible to the ups and downs of the business cycle. These "defensive" sectors offer a degree of stability:
- Fast-Moving Consumer Goods (FMCG): As the per capita incomes increase, more items like premium soaps, branded food products & luxurious personal care products can see steady demand.
- Pharmaceuticals: Growing healthcare awareness and a greater number of aging people drive consistent demand for pharmaceuticals & hospitals.
- Information Technology (IT): The digital revolution continues to fuel growth in IT services and software, contributing to the exports from India. The digital financial revolution led by UPI and the combination of JanDhan accounts is fuelling the growth for all sections of the society and has tremendously enhanced the vibrancy in transaction capabilities.
These sectors may not deliver stellar returns but they offer a safe haven during economic uncertainties. Investors seeking capital preservation and steady dividends can find solace here.
3. A Cautious Outlook: Uncertainties cloud certain sectors
A few sectors face specific challenges that cloud their business cycle outlook.
- Real Estate: Rising interest rates and a correction in property prices pose headwinds. However, rising income levels promise a good long-term demand for housing and commercial properties.
- Aviation: As many as 75 new airports have been built in the last ten years, taking the total count to 149 airports (including helipads and aerodromes). The government’s vision is to take this milestone 149 to 220 airports in the next 5 to 7 years. However ,the recovery of the aviation sector hinges on global travel restrictions, fuel prices and availability of skilled manpower.
Investors in these sectors should exercise caution and closely monitor industry trends.
4. Beyond the obvious: Emerging sectors and disruptions
The Indian economy is not a monolithic entity. New sectors are constantly emerging, driven by innovation and changing consumer preferences.
- E-commerce: Online retail is seeing explosive growth, disrupting traditional brick-and-mortar businesses.
- Renewable Energy: Government initiatives and growing environmental concerns are propelling this sector forward.
- FinTech: Technological advancements are transforming the financial services landscape.
Investing in these nascent sectors can offer high potential returns but also carries higher risk. Careful analysis of the competitive landscape and regulatory environment is crucial.
Rajendra Bhatia is the managing director of Arthashastra Investment Managers, Mumbai. The views expressed in this article are those of the author and do not reflect the views of Cafemutual.