Investment Ideas: Real Estate and Manufacturing Among Top 4 Sectors That Will Boost India’s Investment Cycle

Although investment has continued in a few sectors, a generalized recovery in investment has eluded the country, with overall gross fixed capital formation (GFCF) as a % of GDP falling from 34% in FY2012 to 29% in during the 2020 financial year.

In our view, many macroeconomic factors are in place for a likely recovery over the next decade, given —

(1) Strong demand rebound after Covid-19, with many other cyclical indicators such as short cycle index, capital goods trade and new orders showing strong positive momentum.

(2) Favorable government policy under the government’s emphasis on stimulating investment through increased public investment spending is a powerful tailwind for the investment cycle and follows past government incentives to boost manufacturing and infrastructure.

(3) Improvement of the social balance sheet. Corporate profitability had picked up, with consensus expecting the Nifty index to deliver a 20% EPS CAGR for FY20-FY24E from the nearly decade-long earnings lull of FY12-FY20 when the Nifty

The EPS CAGR index rose only 3%. The financial and cyclical sectors lead the rise in earnings. Furthermore, the Gross NPL of the Indian banking system has increased from 12% in FY2018 to around 7% currently in the FY2015 to FY21 period. This is expected to lead to higher industrial credit from banks. Low leverage on corporate balance sheets amid improving profitability and increased use of credit will create space for the next bullish investment cycle like 2003-2008.

Although interest rates have bottomed and are heading higher, this is unlikely to be a headwind as was the case during the strong bull cycle of 2003-2008, with the initial rate hike indicating a standardization of politics.

In our view, investment cycle leadership is likely to be driven by:

1) Manufacturing: government initiatives such as the implementation of the GST, corporate tax cuts (including a manufacturing tax cut), and multi-sector production-related incentive programs ( PLI) are likely to create a complete ecosystem for the manufacturing sector, thus improving efficiency and competitiveness. of Indian manufacture. The need for global companies to diversify their supply chain is an additional tailwind for India’s manufacturing sector.

2) Infrastructure: Increased budgetary allocations to key infrastructure sectors (such as road, rail, water and urban infrastructure) and national infrastructure pipeline expenditure of Rs 102 trillion in key sectors by FY25 provide strong support for the resumption of investment.

3) Energy Transition: Aggressive efforts and supportive government policy have led several major companies to announce major investments in renewable energy, which should help India reach its ambitious target of 450 GW of renewable energy.

4) Real Estate: Real estate is one of the main components of an investment cycle. The housing market has shown significant improvement since 2020 amid rising demand for residential properties, low inventory levels over several years and high affordability over a decade.

Overall, in our view, multiple sector drivers and favorable macroeconomic conditions are likely to broaden and broaden the breadth and size of this investment round compared to the previous narrow investment round focused on the power sector, and long-term investors should benefit from exposure to the above theme.

(Saurabh Jain, Head, Wealth Management, Standard Chartered Bank, India and Vinay Joseph, Head, Products and Investment Strategy, Standard Chartered Wealth, India)

Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times.

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