Posted by guest blogger and virtual Portfolio Manager Arjun Ashar, a Chartered Accountant and founder of Arjun Ashar Capital Management. He can be contacted at email@example.com. Do check out his 5L Virtual Portfolio.
The prevailing wisdom last year was that the year 2008 was going to be a year of high input prices resulting in a slowdown and 2009 would be a year witnessing an acute slowdown in demand due to the sordid money market conditions of 2008.
In this context, it is interesting to note the performance of Indian steel, auto and cement sectors so far in 2009. All three sectors are simultaneously doing well in 2009. Just look around your surroundings, what do you observe first hand? In my part of Mumbai, I see roads being repaired at a hectic pace before the upcoming elections.
Real estate construction for residential buildings is being carried out at a furious pace. Of course these real estate projects are not one of the fancy ‘a swimming pool in every house’ kind, which were the children of the 2007 boom. The people who are going to buy these apartments in my area are middle and upper middle class folk who will be investing their savings built over a life time. In a city like Mumbai, there are enough people for whom moving into a 2 or 3 bedroom flat from their modest current accommodation is a life long dream for which they prudently saved throughout their lives, come recession or boom. They will lap up their dream home once it fits their budget, since their budgeted allocation for this house is accumulated over many years.
The larger point here is the Indian consumer psyche. This needs to be understood first, and understood very well before even remotely trying to gauge the future outlook for capital markets.
I think it is a great time to do business in India from an operational point of view. The four factors of production (and service) are land, labour, capital, enterprise. The first two are getting cheaper and availability of human resources would be greater than what it was two years ago. It is heartening to see newspaper headlines where many IIM grads are now going to work for public sector units and private sector companies in the real economy are also able to afford their services. Atleast this would end the silly obsession of MBA grads with capital markets. When every bright MBA, CA, engineer of a country wants to be an i-banker or allocate capital in private equity, then who will do the real work of running the companies. I love the positive realignment of human resources that is taking place over the past one year. Jim Rogers is bang on when he says that in future, farmers will be driving Lamborghinis and not brokers.
An IIT grad spends four years in his chosen field of engineering, his IIT stint being subsidized in large part by Indian tax payers, and then after 2 years of graduating he flies to US to run a hedge fund. It was absurd, where was the talent on the shop floor??? Look at the all the great scientists who work for ISRO putting spacecrafts on moon, hardly any of them have the fancy IITian tag. They come from humbler colleges.
Anyway, after land ‘n labour, we come to capital. It is scarce and expensive. Mukesh Ambani rightly said at a recent forum, that at the right risk-reward ratio, capital finds its way to deserving places. I would take him at face value. Look at the oversubscribed Tata Capital debenture issue, Reliance has raised Rs.10,000 from LIC recently. If you have a good business, capital finds you eventually.
Enterprise is a function of many factors and people who run businesses have better things to do than get bogged down by armchair economists, analysts and statisticians who keep chronicling and predicting various things for a living.
In India, a miniscule section of population is affected by stock markets unlike US where everyone has seen their 401k diminish. Plus, we don’t have that mortgage problem. The average size of an HDFC home loan is a mere Rs. 15 lakh which is payable over many years. A large part of our population is engaged in farming and government is a large employer. A person in rural India is more concerned about monsoons than what Roubini says every week and a PSU employee has got problems figuring out how to spend his windfall salary raise, and by the way, his job is secure.
So our demand has picked up January ‘09 onwards and could continue. People who are financially conservative don’t consume something just because they can. They do it when they really need something. Indian demographic composition would mean that people need clothes, food grains, electricity, education, healthcare, basic entertainment, telephony, maybe even cheap cars. Recession or no recession, coaching classes in India remain a roaring business. Just think of all the stuff you have consumed in your life since the day you were born, you were going to need most of that stuff anyway. As an average Indian, you have always lived within your means and consumed only what you needed and could afford. With cheaper input costs of fuel, land, human resources being made available at the right places, India at the moment, as you read this, is sowing the seeds of the next sustainable boom.
DISCLAIMER: The author is not a registered stockbroker nor a registered advisor. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.