What were the key findings from the 25th Annual Wealth Creation Study?
There were only 100 companies that exceeded Sensex’s return of 9.2% in the last 25 years. This shows how difficult it is to be successful in the long run. But the good news is that many companies went public after 1995. These startups now account for up to 50% of the total market capitalization today. This shows that you will continue to get new opportunities.
However, the journey of the last 25 years for the Indian business world has been quite challenging. Only a 9.2% return in 25 years, while representing an average inflation of 6-7%, which means a real return of 2-3%, is not good.
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In the past 25 years, the fastest, largest, and most consistent wealth creators were from different industries: IT, energy, and banking, respectively. Will there be a new sector emerging in the next 10-15 years?
To see what kinds of sectors will emerge in the future, we look at China, which is at least 10-15 years ahead of India in terms of economy size, digitization, per capita income, and demographics, among others. There, we found that out of the top 15-20 companies, more than 50% are digital, while in India we don’t even have a digital company. That is the new frontier that will open. There are many such companies in the private equity stage, but many of the large ones will go public and present new opportunities. At the same time, some commodity companies such as cement and steel in cyclical cycles could return.
Business-to-consumer (B2C) companies look interesting too. There are two types of businesses: B2C and Business to Business (B2B). Consumer-oriented businesses make up nearly two-thirds of the entire business population. I think two-thirds of the future winners will be from consumer-oriented companies.
The study showed that the ratio of corporate earnings to GDP is at record lows (2.3%) and Sensex’s earnings per share (EPS) for fiscal year 2014-2020 have remained unchanged. How should we read this data?
In 2002, when the ratio of profits to GDP of companies was around 2%, it was so depressing that we thought we were in the wrong business. Today we are back at the 2.3% level, which in my opinion is the classic low. Next year, India’s GDP is expected to grow around ₹15-20 crore lakhs, of that there will be no additional earnings for the corporate side on an aggregate basis. The government has not created a very conducive environment for companies to make money. It could also be the fault of the companies. But, in general, the atmosphere is not conducive to companies making money.
However, things will improve when growth returns to the 10-12% levels in FY21-22 and the revenue base increases. My feeling is that this is the bottom, and corporate profits will go up from now on led by telcos.
The price-to-earnings (PE) level is near all-time highs. Would you recommend a cautious stance for the next year? Also, is it time to get some money off the table?
If earnings are going to grow 30-35% next year, then PE levels don’t scare me, but if I think earnings aren’t going to grow from now on, then better sell stocks and go home. . However, my style is not to take money off the table, even at the 6,000-7,000 or 12,000-14,000 levels. Right now we are in an uptrend. Last year Nifty50 was at the 12,500 level and now we are at the 13,500 level. I don’t think this is the time to walk away from the market.
Foreign investors are bullish even when domestic investors are selling. Do you see that this trend will change soon?
It will change and surprise people. One of the biggest issues right now is that the world’s money press is on and the cost of liquidity is zero because inflation doesn’t exist. If global inflation starts to raise its head seriously, then the party will be over. We are in unknown territory. Everyone talks about a V-shaped recovery in the economy, but nobody talks about a V-shaped recovery in inflation. This is my greatest concern.
How would you summarize the market journey in 2020?
We have seen both hell and heaven in 2020. This was a year where we saw all-time highs and a massive drop. I have never seen being euphoric and depressed about the market in a short time. It has been a humbling experience in terms of how incompetent or incapable we are at predicting the markets.
What would be your advice to the investor entering the market at this time?
New investors must go through their own efforts, because if we find it difficult to beat the market, imagine how difficult it will be for the new investor. They can choose to choose stocks on their own or they can go for mutual funds or systematic investment plans (SIPs), which are more for an evolved investor.
But it is difficult to make a lot of money in this market and it will be very competitive for a new investor. It has to be smart and stay under the radar and it has to focus on companies where there is no institutional presence.
What are your expectations for the 2021 Budget?
The government has been setting expectations, but it needs to keep building the infrastructure. They must come up with innovative ways to find resources and not just get bogged down by fiscal deficit numbers. We are close to $ 600 billion in foreign exchange reserves. We are sitting on a pile of cash, with more money waiting to come in, and now is the time for bolder action.
The government must come up with a clear roadmap to achieve the $ 5 trillion goal, and it must refrain from changing this goal anyway. Without significant spending on infrastructure, we will not be able to achieve that goal.
All in all, this will be an interesting budget and I will be looking for a clear roadmap to achieve the $ 5 trillion goal.
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