Carnelian Update - 7 major trends that will define Markets & Economy
Updated: Jul 2
Wishing you and your family a happy & healthy 2021 from team Carnelian.
While 2020 brought about a major setback to all of us in more than many ways, it also brought along new dimensions of life never thought before!. 2020 made us realise the futility of several things in our lives - how we spend time and energy on unwanted things, how we can manage so much with so little. This is the story of every individual, family, society, business and large organisation including the markets.
“While some things will never be the same, some things will never change as well”.
While business models might change business principles must not change
While products and delivery can change but innovation, integrity and ethics must not change
While customer preferences or needs can change but brand loyalty and patronage should remain
While cost, ease and source of financing can change but financial discipline must not change
Best value is created when you invest in change agents - on things which must change with time but with the managements who follow practices which must not change with time. This is the ultimate truth of value/wealth creation.
When you invest with managements who remain focused on time tested principles yet adapting to the changing world, magic happens.
We believe 2020 has unleashed many such trends. We are outlining a few mega trends which will shape the Indian economy and markets, thereby providing enormous wealth creation opportunity for early movers.
1. Technology will rule the way individuals, businesses and organisations operate, creating several opportunities
While migration to technology is well understood and has been underway for decades, Covid has accelerated its adoption like never before. There are many opportunities around this, some very obvious, some second and third order impact/opportunities created on account of the J curve in technology adoption. Humanity will never be the same on this front and this forced adoption of technology will create several opportunities. To name some :
“Ancient civilisation was entirely dependent on god created clouds; emerging world will be equally dependent on man created clouds” – Team Carnelian
Digital migration will create significant jobs and businesses like never before - much bigger than Y2K, ERP & the initial internet wave. Digital adoption will be the top most agenda of every CXO table/Board room/Government resulting in faster adoption of SAAS, digital platform and IOT services.
ERP and the initial internet wave were in context when digital adoption was discretionary and good to do but now there is technology intertwined with everything business and humans do. Digital adoption post COVID world is vital for survival hence no longer discretionary. This change will create outsized opportunities while putting digitally laggard businesses to risk as well.
Our research reveals USD 90 bn of incremental digital opportunity for Indian IT sector translating into USD 50-60 bn crores of incremental salary p.a. in the hands of Indian IT employees.
b. Data and Artificial Intelligence
“Data coupled with artificial intelligence will be the new fuel”
We visualise a world where everything will be driven by Data. Every activity of humans can be tracked. Privacy will go down significantly. This will obviously bring transparency as well. Migration from the unorganised to organised will accelerate multi-fold. Data will create lots of noise and the need to segregate between noise and information will significantly go up thereby leading to many innovations in the AI world. Credit appraisal will become a lot more robust and scientific. Credit cost, insurance cost will be based on individual data rather than standard approach.
c. Disintermediation (D-risk) as a trend will accelerate –
“Disintermediation thrives on inefficiencies in the system; elimination of inefficiencies leads to elimination of intermediation”- Team Carnelian
Second order impact of adoption of technology is that it brings about transparency and efficiency. As availability of information improves, intermediation business will either get disrupted or will have to be reimagined. Across sectors be it consumer goods, financial services, media, entertainment, etc businesses will migrate to direct customer thereby disrupting or putting pressure on intermediation business. Government to Citizen will again create and disrupt many business models like farm mandis,
ration shops, toll collection. Technology will enable Government resources being directed to the desired section more efficiently. Team Carnelian is constantly evaluating various sectors and businesses prone to the D risk as well as opportunities emerging out of this disintermediation.
2. Manufacturing will be significantly large opportunity for India Inc. – Historically, manufacturing has always been the less desired sector in India. China became the world’s factory over the last 3 decades. This is set to change with every large country and corporation looking to diversify away from China at the earliest. It will move from China to countries such as India, Thailand, Vietnam, etc. We foresee significant opportunities for manufacturing in India across sectors such as Chemicals, API and Pharma, Auto Ancillaries, Capital Goods, Materials, Textiles, etc. We believe, manufacturing alone has the potential to create a USD 1 trillion opportunity in the coming decade. 3D printing, nano technology, sustainable technologies are some of the new sub themes which will create many opportunities. Recently, L&T 3D printed a ground plus one building with reinforcement - first time ever in India. Like this there are several innovations happening in India for new age manufacturing.
3. BFSI will find new wings - BFSI has seen a structural change over the last 4-5 years with utmost focus on asset quality, building strong liability franchisee along with efficient technology enabled delivery platforms. Its Balance Sheet has emerged much stronger, entities are consolidated, PSUs are more independent now. Banks with utmost focus on building technology led platform and AI led risk management tools will survive and thrive. There is huge scepticism around credit growth especially corporate credit, we believe this will surprise positively. Credit growth number can be as strong as 20% over next 2-3 years. We foresee a massive wealth creation opportunity in this sector. We believe, the profit pool of the banking sector will grow to ~USD 80 bn, a 20x jump in the next 10 years. The current market cap of all banks put together is around USD 350 bn. A massive wealth creation possibility.
4. Alternate energy will create and disrupt things - While this is underway for some time, we think this will happen sooner than markets are anticipating. EVs will disrupt many companies as well as create new companies. Renewable energy, bio fuel and energy storage will be the big game changers. This will disrupt many businesses in mobility while creating many new models. Key is to find out potential winners and avoid losers. Total market cap at risk for this is almost close to USD 150 bn. Many players in auto, auto ancillary, thermal power will go through what’s happening to print media over last 10 years. There will be new winners and many incumbents will face challenges.
5. Real estate sector will emerge as the sunrise industry - RERA implementation across the country has given this unorganised sector new wings to fly which will accelerate the shift from unorganised to organised players. We foresee significant consolidation to happen in the sector. What has happened to many sectors in the past like Banks, Capital markets will happen to this sector as well. This is a decadal opportunity. Total market cap of the sector is USD 20 bn which is less than ~1% of the total Market Cap. This can multiply manifold from here. Early signs of this transformation are already visible considering the registration numbers which are at a 8 year high over the last 2 months.
6. Education as a sector will get seriously re-imagined in next 5-10 years – Today the conventional education model is being questioned; world might actually move from education to learning. In a country of 1.3 bn people and a large young population with huge reskilling needs, this big shift will create huge opportunities. This transformation will present large employment opportunities as well as creation of new IT enabled learning platforms. We foresee significant addition to skilled workforce leading to a massive shift from an agrarian economy to an industry/service sector dominated economy.
7. Big Structural change in the interest rate scenario will fuel growth engine – We believe interest rate band in India has structurally moved downward, which is a big shift. India has historically seen interest rates spikes largely because of imported inflation or due to serious distress on our forex reserves or currency. Our forex reserves are likely to remain very robust due to strong capital flows and more importantly well-placed CAD deficit (growth in IT services, manufacturing exports and import substitution). Capital flows can be erratic but balanced CAD brings lots of stability to the interest rates. We believe India has never witnessed this set up before and is likely to create a huge cushion both for interest rates and liquidity. Also, low interest rates channelises more capital to risk, thereby fuelling growth.
What will not change?
While many things will change, but basic human behaviour will not change. Human emotions like greed and fear will continue to rule markets and create cycles like it has done over centuries. Basic traits of wealth creators will not change. Entrepreneurs and companies with strong focus on building innovation, following financial discipline, adhering to the highest standards of governance are the ones which will continue to remain top wealth creators.
Of course, in a bull market when the water level is on a rise, at times it becomes hard to distinguish between the good and the great. At times, the great looks like an underperformer but that’s the nature of the market!
How have we positioned our portfolio to capture the above-mentioned themes?
We spend utmost focus on adaptability of corporates and managements to the emerging trends while choosing our portfolio stocks.
Team Carnelian will continue to focus on our approach of investing in companies which are in the midst of a big trend provided it meets our quality criterion. Only when both meet, magic happens.
All our investments will continue to go through the stringent MFRG and CLEAR framework before making debut to our portfolio. Our portfolio constantly reflects these trends.
In our portfolio we are heavyweight vs the benchmark on 3 sectors, viz - IT, Pharma and BFSI. We foresee significant tailwinds in IT and Pharma due to the unique India advantage coupled with all the attributes satisfying the above-mentioned criteria. In the BFSI space we are well spread between credit and non-credit stocks. While credit stocks are prone to cycles and various macro moves, non-credit stocks provide sufficient cushion against steep cyclical moves
We have also specifically launched a separate strategy “The Shift Strategy”, to capture the boom led by manufacturing and technology sectors.
We shall be more than happy to answer should you have any query or engage to impart more understanding.
We encourage you to read our earlier newsletters for some detailed insights like
Nov’20 Update - What next?,
Oct’20 Update - Learn from history to do an encore,
Sept’20 Update - Digital Revolution,
Aug’20 Update - Lollapalooza Effect in making,
July’20 Update - Emergence of a new trend
We wish you a great 2021 and we believe 2021 will surprise most optimists in wealth creation!
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