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'India has ZERO probability of slipping into a recession'

This was the consensus opinion of all the economists surveyed by Bloomberg last month.

Here's the final result...

Chart, bar chart

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Surprisingly, the consensus gave a 25% probability of a recession to our Asia Pacific neighbours Japan, South Korea and even a 20% chance of recession to China.

India is the outlier in the global economic landscape with a zero probability of recession.

So if India is not going into recession, what does that mean for an investor like you?

Well, to answer that let's look at how foreigners invest in India...

Foreign investors decide weightages to countries based on growth, political stability, demographics, currency, etc.

They always look at stock markets on a relative basis. We are expected to relatively outperform the global growth rate. So foreign money will flow in to India.

I remember reading a quote which rightly said, 'There is always a bull market in some part of the world'.

To identify which country can have a bull market, foreign investors look for the underlying investing USP of the country.

Every Country has a Cyclical Investment USP

CountriesUnique Selling Proposition
IndiaConsumption, IT
ChinaExport
USAInnovation, Technology
GermanyChemicals
BrazilCommodity
VenezuelaOil
Saudi ArabiaOil
DubaiTourism
TaiwanSemiconductors

Source: Equitymaster


If global investors bet on # oil going to US$ 150-175, the bet is on Saudi Arabia and Venezuela from the above table.

If the global investor is betting on a commodity boom, then the bet is on Brazil. If the bet is on electronics and auto, it would be prudent to invest in Taiwan.

And if the bet is on oil crashing to US $50, the bet is on the biggest importers of oil, i.e. India.

This is how foreigners think about macros before investing in India.

Now, if the prediction about a recession plays out, the big impact will be on crude oil and commodity prices. They will crash.

In that case, on a relative basis, the attention shifts to India. FIIs will be overweight on India, and incremental flows will be channelled here.

And that brings me to my top 3 sectors for the next 3 years?

  1. Quick Service Restaurants (QSR) - The Consumption Theme

India has always been a consumption economy due to the huge demographic dividend we have in terms of our population.

Mc Donald's has only 500 stores in India, while Dominos Pizza has only 1,500 stores in India.

The scope is huge. I say this for two reasons. First due to the under penetration, the scope of expansion is massive. Second, due rise in India's income levels more people will eat out regularly. This will be the cause of a huge boom in QSR sales.

Now the QSR space should not be confused with FMCG companies, where the penetration levels are extremely high. If Colgate stock is to see a sharp run up, you will have to start brushing 3 times a day.

  1. Capital Goods - Make in India

Over the past 10 years, the most unloved sector has been capital goods. The last time I heard of people talking about it was before the 2008 crisis. The sector has been in a slumber over the past decade.

Now the thing is, the stocks have run up over the past 1 year, with earnings slowly catching up. But the bet is in such cyclical sectors, when capex picks up, earnings can even quadruple in two years. The key is to identify the right companies.

  1. Credit Card Companies

Credit card spending touched an all time high of 1.14 tn in May 2022.

Credit card penetration in India is barely 5.5% of the population.

Credit card users spend over 40 times more than debit card users when they transact online.

Now if you combine all these 3 points, the runway for growth in this highly underpenetrated sector is huge. And with only one listed player, I believe the stage is set for re rating.

Credit card firms are an indirect bet on discretionary consumption and e-commerce in India.

Sectors to avoid

If the assumption is that the US and many parts of Europe are going into a recession, then on a relative basis, companies which are predominantly export oriented need to be avoided.

These are sectors like IT and textiles.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

 

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