Five megatrends you can focus on in 2021 include technology, manufacturing, banking, real estate, interest rates, Swati Khemani – Founder, Carnelian Capital said in an interview with Moneycontrol’s Kshitij Anand.
Swati has over 10 years of experience in the financial services industry including seven years at Edelweiss Financial Services across the Investment Banking and Institutional Equities businesses.
Here are edited excerpts from the interview:
Q) In your recent note you have highlighted megatrends that will shape the economy & markets. Which are those trends?
A) Five megatrends you can focus on in 2021 that include Technology, Manufacturing, Banking, Real Estate, Interest Rates.
Technology spend has accelerated significantly across the globe:
IT services is one sector where demand is global but supply is only by Indian companies. Over the next 5 years, double-digit growth in this sector will create sizeable returns.
Also, it will earn forex for the country as well, and at the same time generate employment opportunities.
India’s manufacturing GDP will grow from USD 450 bn to USD 1 trn over the next 5 years. The government’s efforts to promote and China+1 strategy of most global companies is accelerating this trend.
This will have a positive impact on the investment cycle, job creation, Current Account Deficit of the country. This will be across various sectors like Chemicals, Capital goods, Auto Ancillaries, Pharma, Metals, and many more sectors.
India’s banking sector has gone through significant pain and is now consolidated on most fronts. The asset quality issues seems to be under control, balance sheets are capitalised and the growth over the next 3-5 years will be in double digits.
This will lead to a sizeable wealth creation opportunity. The profit pool can jump 20x over the next decade to USD 80 bn.
Real Estate Sector:
The real Estate sector post-RERA implementation across the country has given this unorganised sector new wings to fly which will accelerate the shift from unorganised to organised players.
We foresee significant consolidation to happen in the sector. What has happened to many sectors in the past like Banks, Capital markets will happen to this sector as well. This is a decadal opportunity.
The total market cap of the sector is USD 20 bn which is less than ~1% of the total Market Cap. This can multiply manifold from here.
Early signs of this transformation are already visible considering the registration numbers which are at an 8-year high over the last 2 months.
Big Structural change in the interest rate scenario will fuel growth engine:
We believe an interest rate band in India has structurally moved downward, which is a big shift. India has historically seen interest rate spikes largely because of imported inflation or due to serious distress on our forex reserves or currency.
Our forex reserves are likely to remain very robust due to strong capital flows and more importantly well-placed CAD deficit (growth in IT services, manufacturing exports, and import substitution).
Capital flows can be erratic but balanced CAD brings lots of stability to the interest rates. We believe India has never witnessed this set up before and is likely to create a huge cushion both for interest rates and liquidity. Also, low-interest rates channelise more capital to risk, thereby fuelling growth.
We believe the combined effect of all these factors will create a magnifying impact on growth, asset valuation, and wealth creation.
Q) The Realty sector also made a bottom in March last year and since then it only went in one direction and that is higher. Do you think it will be one sector that could outperform?
A) This sector has been going through pain for the last 10 years. Interest rates coming down, various schemes by the government to boost affordable housing, stamp duty reduction all are healing to get the sector back. We feel this sector will do very well over the next 10 years.
Q) The one sector which is usually ignored or unloved is the education sector. Do you think things are changing for good in the sector? Education as a sector will get seriously re-imagined in the next 5-10 years.
A) Today, the conventional education model is being questioned; the world might actually move from education to learning. In a country of 1.3 bn people and a large young population with huge reskilling needs, this big shift will create huge opportunities.
This transformation will present large employment opportunities as well as the creation of new IT-enabled learning platforms. We foresee significant addition to a skilled workforce leading to a massive shift from an agrarian economy to an industry/service sector dominated economy.
Q) How can one distinguish between a good and a great opportunity especially at a time when the liquidity wave is lifting all the boats in the sea?
A) One has to look at the structural drivers of growth, its sustainability. In the time, when liquidity drives everything, the sustainability of growth & management team is a key differentiator.
As Warren Buffet says, it’s only when the tide goes down, you will find who was swimming naked.” It’s very essential to identify the right theme and the right management team.
Q) How should one position the portfolio in 2021? What is the Asset allocation strategy according to you?
A) Asset allocation is a function of individual risk appetite. We remain quite bullish on equities from a medium to long-term view.
We are quite confident that equities will deliver 15-18% return over 5 year period. Within equities, one should allocate capital to above-mentioned themes approximately in the ratio 30:30:30:10.
Q) What is your expectations from the Budget? Which sectors are likely to remain in focus and any policy measure you think could cheer markets?
A) We think FM should reduce personal income tax rates as it is very high compared to corporate tax rates. It should have aggressive targets around infra spending and divestment. FM can keep easy fiscal deficit targets for this year.
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