Trends of the Investing World: Identifying Long-Term Themes for Wealth Creation

2023 was a year of significant change for the Indian economy. The year began with widespread pessimism about growth and inflation, but by the end, there were signs that the peak of the interest rate cycle had been reached. Foreign institutional investors (FIIs), who had previously been net sellers of Indian assets, became overly optimistic about the country’s prospects. Small and mid-cap space, which were once considered risky, soared to new highs, with indices gaining as much as 50%.
Given these stretched valuations and the euphoric state of the market, it is now more important than ever to identify long-term themes that can help you create wealth and protect your investments. Here are three themes that we believe have the potential to deliver strong returns over the long term:

1. The Revival of the Capex Cycle
Capital formation in India is at a 15-year high, with the latest gross fixed capital formation (GFCF) to GDP ratio at 35%. The recent victory of the ruling party in regional elections has cleared the way for the 2024 general elections and has created a stable political environment that is conducive to investment.
The third term of Prime Minister Narendra Modi is expected to see a continuation of his growth-oriented policies. The share of capital expenditure in the budget has increased from just 10% to 22% over a period of time and we expect that continuation of growth-oriented investments will kickstart the capex cycle for the economy. The latest RBI survey on capacity utilization indicates that peak utilization is paving the way for private capex participation. The government’s production-linked incentive (PLI) scheme is also expected to lead to capex outlays of approximately Rs 2 lakh crore.
The government’s commitment to increasing the contribution of the manufacturing sector to 25% of GDP is likely to lead to further capex investments. This is a positive development for Indian companies, as it will create new opportunities for growth and expansion.

2. The Rise of Discretionary Consumption
India is expected to be the third-largest economy in the world by 2030. As the country’s GDP grows, per capita income will also rise significantly. This increase in per capita income is likely to lead to a disproportionate growth in discretionary spending, as has been seen in other economies that have undergone similar transformations.
If we draw parallels with China, which is now the world’s second-largest economy, we can expect to see significant growth in categories such as travel, healthcare, out-of-home consumption, branded goods, leisure, and recreation. These categories could grow by as much as 5x to 20x compared to other categories, which may only see sub-5x growth.

3. Green Energy
India is on a mission to double its energy capacity to 1,000 GW by 2030. While overall capacity is expected to grow by 2x, the contribution of renewable energy sources is expected to grow by 3x, providing a huge runway for growth.
The EV battery market is expected to attract investments of around USD 10 billion over the next decade. Large Indian companies have already announced significant capex plans for the green hydrogen space. The government has also preponed its ethanol blending targets based on the initial success of the program, which is likely to lead to more investments in this area.

Conclusion
These are three of the megatrends that we believe have the potential to drive wealth creation in India. By investing in companies that are well-positioned to benefit from these trends, you can protect your investments from short-term volatility and generate strong returns over the long term.

The author is CEO, Torus ORO PMS. Views are personal. 

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