Providing warmth to shivering India: Analysing embedded trends that will define 2021
December 8, 2020 6:48 PM
As one tries to untangle oneself from the cobweb of misinformation, one gets caught in the shackles of poor economic growth.
It is our need to implement economic policies that generate meaningful jobs for our youth and ramifications of the saffronisation of India.
India Inc. has experienced stellar sales due to festive demand and pent-up consumption (online players achieved USD 8.3 billion in gross sales this festive season, thereby growing 65% on Y-o-Y basis). Rural demand has been resilient and has outpaced urban demand and positive developments on the Covid-19 vaccine by three vaccine research and development groups (globally) have created a feeling of euphoria among Indians. However, one must not confuse this transient festive cheer with the combined impact of these to get our economy back on track – something with statistical modelling can’t forecast to the T. I believe this enthusiasm is driven by the use of selective data-sets and by employing a myopic vision; thereby, ignoring fault lines in public policy and providing a select political coterie with an opportunity for political chest-thumping.
As one tries to untangle oneself from the cobweb of misinformation (the rise of deep-fakes in India is a worrying sign), one gets caught in the shackles of poor economic growth. Rightly so this transient economic cheer was mired by the fact that India entered into a technical recession on 27 November 2020 – only reinforcing what I had suggested a little over a month back that India’s economy is truly freezing. This contraction combined with a renewed rise in covid-cases in Delhi and elsewhere clearly highlight that we are not in the post-pandemic phase as many would like to believe.
I believe there exists a void in our society that has been developed due to an indigenous duality. It is our need to implement economic policies that generate meaningful jobs for our youth and ramifications of the saffronisation of India. This duality exists at a time when the implementation of existing Government schemes has shown us that they can mirror the quality of deep fakes with alarming speed. The resurgence of the rise in Covid-19 cases across India further emphasis how short-term gains (festive driven demand) impact long term prospects of growth (health of its citizens).
By looking at the Government’s response to covid-19 to fortify its economy, it seems that the economic development has ODed on political ego’s rather than been given the opportunity to have hot soup (ability of India Inc. to adapt to changing consumer tastes and technological trends, effective capital allocation for economic progress and an action plan to tackle tax terrorism heads-on) on a winter night. Therefore, as we filter out the noise we need to look at the best way in an imperfect world (with information asymmetry) by which we can ensure we derive value from government policies and animal spirits – something I believe we have put on pause for now.
I feel the following three embedded trends will help India and India Inc. navigate not only the duality that it faces today but will also give it the ability to be prepared for another uncertain year -2021. These embedded trends will help us to ensure we can live in the moment, and not be anxious about what could or could not be.
The pandemic economy and how will people invest in 2021
This pandemic has shown that investors have a propensity to park their funds in gold or gold-backed assets when the equity markets become volatile – thereby providing them with a safe haven that ensures that their money works smartly. As the global community continues its war against the covid-19 pandemic, global institutional investors like Hedge Funds and Family Offices have bankrolled the production of masks and PPE’s in exchange for profit sharing arrangements – thereby developing an alternative asset class to invest in: the pandemic economy.
Another diamond in the rough that many institutional investors are silently betting on to hedge their portfolios are cryptocurrencies like bitcoins – due to their zero long-term correlation with other asset classes, opaque ownership structures, increased traction with corporate clients and easy cross-border movements despite de-globalization trends. For the traditional retail investors, the pandemic along with the declining interest rates have ushered them into passive investing. This trend can be observed by increased adoption of online brokerage houses and millennials starting to be concerned of their financial health. Therefore, I feel institutional investors will continue to invest in the pandemic economy and cryptocurrencies in order to ensure their returns while retail investors will be bullish on index funds (passive investing) along with some pivot towards small and mid-caps stocks in 2021. I believe that these investment strategies will slowly penetrate into the Indian market by mid-2021.
Private equity will drive job creation Even though most investors have started to get conscious of the fact that their portfolio must have a positive unit economics profile, private equity investors have supported many of their portfolio companies by providing additional funding (to meet their cash-flow problems) and assisted in scrutinizing the sustainability of their business model in post-covid era ever since the pandemic has impacted the health of our citizens and our economy. Since public equity returns are most likely expected to be historical returns and bond yields are expected to stay low, I believe we will observe increased allocation of institutional investors in the unlisted company side – albeit in a phased manner.
With India clocking in 342 Private Equity (PE) investments valued at ~ US $ 19.1 Billion in H12020, it seems that the job creation from this capital allocation might overpower the fiscal stimulus presented by the Government of India through various stages of the lockdown. The benefits of job creation and the multiplier effects of such capital allocation are apparent, and hence even our honourable Prime Minister is tapping into global institutional investors for the fundraising efforts for India’s ~ INR 111 Crore infrastructure investment pipeline (for the next 5 years). I believe, as we dive into 2021, we will see increased activity by PE players that will help to optimize businesses, streamline operations and cut the umbilical cord of those that are burning cash despite being warned not to.
Digital crackers will be a norm:
The increasing shift towards being reliant on digital initiatives and channels to support our lives has become quite common ever since March 2020 – largely driven by safety concerns. The Digital Diwali that brands experienced was sweet to say the least is a classic example of how even in uncertain times “Online” as a sales channel is expected to grow going forward. And, this underlying dependence on technology to support the day-to-day activities and businesses is what I refer to as “Digital Crackers”. I believe in 2021, we will see increased regulation of this digital economy built on the foundations of “Digital Crackers” (ranging from data security to digital taxation). Given the fact we are living in an economy that is “always-on” I feel work-from-anywhere as a concept will provide organizations an opportunity to work 24×7. Learning from the past few months, I feel organizations will develop virtual socialization mechanisms as part of their work culture, to ensure they retain quality talent.
As we move into Samvat 2077, we will experience economic headwinds from sporadic shutdowns due to the rise of covid-19 cases and economic policies that are focused on building a legacy rather than solving a crisis. This might cause India to shiver. With this in mind as we welcome 2021, I believe the ability to invest in the pandemic economy, strategic allocation of capital by PE players in select sectors and the resilience to be comfortable with “Digital Crackers” are trends that we must focus on as these will provide the warmth that India needs.
Shahan Sud is an Investment Banking Analyst at Anand Rathi Advisors. Views expressed are the author’s personal.