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  • Writer's pictureTikona Capital

2022 – Year of consolidation and take off for India

Updated: Sep 25, 2023

Dear Investor,

First, let me take this opportunity to wish you and your family a very Happy New Year. With the start of the year, we are looking ahead with much more optimism as pandemic turns into an endemic, everyone turning health conscious, digitally connected and economy in recovery/expansionary mode. Past two years have created several opportunities to be much more agile, to be antifragile and build continuity in businesses. While the pandemic was an adversity, it has put India into a sweet spot and created several opportunities for India.

Reflections 2021...

In the year 2021, NIFTY gained of 24% and more than 100% from the lows seen in March 2020. During this phase we as Investors, leaders, family heads and individuals have learned importance of health to importance of digital integration. The pandemic has changed priorities of people and human race with the once in century pandemic, we are now better equipped to handle the exigencies. While its unfortunate to see near and dear ones leaving this world, the adversities have made us much stronger.

During the year we saw, with low interest rate regime, abundant liquidity, re-opening of the economy, strong domestic Mutual fund inflows, broader retail participation leading to Small Cap 250 returning ~ 60% outperforming the benchmark Index Nifty (2021 Return 24%).

Year of Sector rotation

2021, saw global sectors like IT Service, Metals delivering healthy returns, while towards the second half laggards like PSU, Reality, telecom, Media caught up to the market rally. While FMCG, Banks and Auto underperformed as the global interest rate outlook is on an upward trajectory, IT services outperformed due to strong demand driven by migration to cloud, digital adoption and continued increased demand for work from home. Metals saw traction due to price increases spurred by supply constrains as well as climate control measures by China.

Looking ahead..

Last 2 years 2020/2021, despite being challenging has set the ball rolling for the upcoming

decade. Opportunities are being created out of adversities.

High inflation due to supply chain issues, which were expected to be transient are now appearing to stay for longer than expected. With liquidity situation reversing from an abundant to a normalised scenario, we will see capital moving away from speculation to much more durable investment avenues. This would lead to moderation in asset prices. Globally many countries central bank balances sheets are likely to be in far worse situation than pre pandemic levels, India’s fiscal position is expected to be in much better shape than other countries. While the central bankers globally would be wary financial market instability and differential pace of global normalization, managers that can navigate their business through these medium-term headwinds are likely to emerge much stronger for the upcoming decade.

The pandemic has pushed the world in to faster rate of adoption of digitalisation and thereby leading to huge investments in technology. These investments will drive efficiencies in the processes as well as most offline business will transform towards online. This creates more room for innovation in businesses. Risk taking capability is expected to go up by the businesses as we have seen in the Startup eco system. Managers that may visualise this change and build talent pool to steer through this imminent transformation will build a robust and agile business model ready for decades.

India as a country, with strong leadership in various fields is emerging as global powerhouse. India has demonstrated successful acceptance of change at the scale never heard of on this planet – Demonetisation, GST, Vaccination, UPI, Aadhaar, Mobility (physical as well as digital) and many more. Last decade was building up of these connecting agents, upcoming decade India will see as one of the largest countries emerging to be the global powerhouse. Business managers looking to grab these global opportunities will build scale and quality to match global client’s expectation scaling up at faster rate than their peers.

Sectors like IT Services and Pharma has demonstrated its service delivery on the global scale, with these sectors as role model coupled with PLI schemes, India is likely to reap higher growth in exports in many sectors. Chemicals, Agro and Pharma – API, auto ancillaries and many more are already demonstrating their participation onto the global stage.

For the next decade we would bet on opportunities emerging out of these themes – Exports/China +1 – Chemicals, API/Agro exports, import substitution – Chemicals, manufacturing outsourcing, Consumer discretionary – QSR, Building material, eauty/apparel, coupled with multiyear themes of IT services, Private banks etc.

While above themes may provide top-down direction, portfolio allocation will be driven by the bottom up approach of investing in companies where management is competent, dedicated and executionist to deliver growth by building differentiation and generate higher return on capital than their cost of their capital. Given the transition that businesses are going through from pandemic to endemic and more so the Indian businesses going from domestic to global platform, we would back the business managements that are focusing on building better engagement with customers to create differentiation, creating talent pool having digital mindset and building scale with B2B2C approach.

What to do?

India is going through a multi-decadal transformation and emerging as a global powerhouse, as an investor one must stay invested despite higher than the past valuations. There have always been reasons to sell driven by adversities like GFC, global trade wars, twin deficits, elections, pandemic and now inflation, despite all such adverse events markets have generated healthy returns on a rolling 10 year basis most of the times.

Equities continue to provide inflation adjusted post tax returns than any other asset class over a period. With advent of medicines and research at human DNA levels, average living age of human life is going up and is further expected to increase. This will accentuate the need for creating corpuses that may last longer than current estimates for your life.

While staying invested is the best option at this point in time however one must always stick to its asset allocation based on its phase of life, income stability, dependants and risk appetite. Too low asset allocation towards equities may create shortfall in corpus and suboptimal returns to achieve life goals whereas as excessive exposure to equities may create volatility thereby leading to unwarranted decisions.

To summarise, based on your risk profile and suitability stay invested for the decadal growth that India is likely to go through. Stay invested in businesses with management that can build digital talent pools, scale up to global levels and generate superior growth/return profile.

Happy investing in this wealth creation journey!

Sumit Poddar

Chief Investment Officer & Smallcase Portfolio Manager

Tikona Capital

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