India is the market for the next decade

Corporate earnings appear to be on the cusp of revival. The earnings growth is expected to be more than 50 per cent between FY20 and FY22; earnings growth momentum is likely to continue at more than 25 per cent annually over the next couple of years.



By S Naren

Published: Sun 16 Jan 2022, 9:55 PM

Indian equities are well poised for the next leg of wealth creation, thanks to the beginning of the new corporate profit cycle; after a hiatus of nearly a decade. Backed by the secular earnings growth and aided by structural uptrend, India is likely to be among the leaders in GDP growth for the current decade, making it a compelling case for long-term wealth creation. The long term outlook for Indian equities remains positive owing to the various reform initiatives carried out by the Government coupled with a strong pipeline of infrastructure related initiatives lined up over the next several years. Also, unlike the US, India’s corporate profit to GDP remains low and hence in cycle terms, India is far from peak both in terms of corporate profits and valuations.

The government has already set the ground for a strong economic growth over the next decade through passage of bold reforms in sectors like financial services, manufacturing, taxation, infrastructure etc. The government’s five-year production-linked incentive scheme (PLI), buoyed by its success, has been expanded to 10 more sectors. This is estimated to generate Rs30-35 trillion of additional production value over the next 5-7 years. Also, Indian economy stands to benefit from the China+1 strategy adopted by various global manufacturers. The expenditure push will give impetus to private capex and consumption demand by creating employment. Owing to these factors, we expect business cycle to improve further.

Corporate earnings appear to be on the cusp of revival. The earnings growth is expected to be more than 50 per cent between FY20 and FY22; earnings growth momentum is likely to continue at more than 25 per cent annually over the next couple of years. If the economy continues to grow at a nominal rate of 10 per cent annually and if profit share in GDP remains around long-term average of 3.5 per cent over next five years, it would easily translate into 20-25 per cent earnings growth for the broader market. Thus, it would provide pivotal impetus for the long-term wealth creation for investors. Another factor that would add to prospective return of the Indian equities is a palpable increase in capital expenditure.

So, when investing for the long term, adhering to asset allocation is very important. At the same time, the portfolio should be prepped to withstand volatility which could occur from time to time. The easiest way to address both this requirement is through dynamically managed asset allocation schemes. Here, based on the prevailing opportunities across equity and debt, the fund manager will toggle one’s investment corpus such that one can gain from these investment opportunities. The equity allocation in case of a funds like Balanced Advantage Fund can be anywhere from 30 per cent to 80 per cent. Because of this arrangement, an investor is free from the need to track markets closely. Hence, dynamically managed asset allocation scheme emerge as a one-stop solution for your asset allocation needs. In case you wish to add gold to the mix as well, then opt for a multi asset fund.

For a savvy investor looking for equity only investments, business cycle fund can be considered. As previously mentioned, the Indian business cycle is favourably placed. In such a fund, opportunities across sectors/themes/market caps, depending on prevailing business cycle will be tapped into. Since the fulcrum of investments here is based on macro indicators, an investor should remain invested with a long-term perspective to reap rewards from this type of investing.

On the other hand, if you are an investor who is unsure whether to invest in a large, mid or small cap space, the answer could be in the form of a flexi cap fund. The advantage here is the fund has the flexibility to invest across market capitalisation. Basis the attractiveness of the various pockets of the markets, the fund manager can deploy asset accordingly, thereby providing investors with an optimal exposure to different segment of the equity market.

To conclude, the current decade is a pivotal one for India as many of the long-term benefits of the steps taken over the past few years is set to play out. As the economy grows and advances, the benefits of the same will be reflective in equity markets as well. So, if you are an investor willing to stay invested with a decade long view, then India is the market to be in.

S Naren is CIO, ICICI Prudential AMC


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