The Indian economy is on a roll. Stock markets are at an all-time high, while last year, for the first time, corporate India’s return on equity (RoE) overcame the US RoE number. Bharat Shah, executive director, ASK Asset and Wealth Management group, in an interview with Kundan Kishore, Deputy Editor, Outlook Money, sheds light on where India stands in terms of value creation opportunities. Edited excerpts:
The Indian economy is on a roll. Stock markets are at an all-time high, while last year, for the first time, corporate India’s return on equity (RoE) overcame the US RoE number. Bharat Shah, executive director, ASK Asset and Wealth Management group, in an interview with Kundan Kishore, Deputy Editor, Outlook Money, sheds light on where India stands in terms of value creation opportunities. Edited excerpts:
How do you perceive the current economic landscape, and do you believe we are on the verge of experiencing not just a singular golden decade, but rather many golden decades going forward?
I believe that our country is on the cusp of the greatest economic expansion it has ever witnessed. This expansion is not only unprecedented in comparison to our own historical achievements, but also surpasses any comparable examples worldwide. Consequently, the rate of economic growth will be a defining feature of what we are poised to witness for a significant period ahead.
What are the key drivers that make you confident that our economy will perform better?
The first factor is predictability. When something is more predictable, then it acquires a greater value, because what is predictable reduces uncertainty. If it reduces uncertainty, then it reduces risk, and what reduces risk becomes more valuable in the present because the value of a business is nothing, but evaluating the probability (of growth) in the future. So, risk reduction has a direct impact on improving the value. I think the first important change compared to the past is the predictability of growth.
The second factor is durability–something which gives high growth, but only for a short period of time will only create that much. For something whose growth rate is not particularly exciting, the outcomes will still be self-limiting. But when the growth rate is high and it is durable, then something measurable is created.
The third aspect is the quality of growth. Quality gives sustainability and explicability to growth. Quality of growth offers protection like a kavach (shield) against the challenges of environment, while quality reflects in other aspects, such as superior returns on capital employed and equity, and things like moats in the business so that it remains competitive and can deal with challenges in a much better way. It also reflects in reduced leverage of the system so that it is fundamentally stable and safe over a period of time.
How does the Indian market compare with other markets in terms of value creation?
In the last 30 years, the US economy grew at a rate of 3.8 per cent, yielding market returns of 9.2 per cent, which translates to a premium of almost 5 per cent. This premium can be attributed to various factors such as quality, superior RoE, ease, predictability, governance, solidarity of businesses, capitalist market culture, and overall strength.
In contrast, India experienced 8.5 per cent growth in gross domestic product (GDP) in nominal dollars with market returns of 8.4 per cent, resulting in a 1:1 ratio. While there is no premium, there is also no discount, which is a positive aspect. Elsewhere, China achieved a staggering 13.5 per cent compounded growth rate in GDP over 30 years with market returns of less than 2 per cent, resulting in an 11 per cent per annum discount due to inferior quality.
It seems unlikely that the US will replicate its 3.8 per cent GDP growth rate. Societal and economic leadership characteristics suggest that the quality premium in the US might decrease, potentially falling below the 5 per cent compounded per annum, as seen historically.
Although the growth rate is expected to be lower, the larger economic base and reduced dynamism may contribute to a shrinking quality premium. In the case of India, the rate of growth is anticipated to be in double digits in nominal dollar terms, with the key element being the emergence of a quality premium—a significant change compared to historical growth rates. This puts India in a favourable position to deliver both improved growth and a quality premium.
What are the key growth drivers for the Indian economy?
If you consider the last 10, 20 or 30 years, India and the US have been the top two markets in the world consistently. The leadership position has alternated between the two, and the trophy has shifted between India and the US at different periods. In terms of dollar returns over the past 10, 20, and 30 years, India has consistently held one of the top two positions in the global markets. It is anticipated that India will not only continue to maintain this standing, but will also experience the benefits of a quality premium along with a superior growth rate.
If you are looking at value creation in business, four critical elements stand out: strength, durability, predictability, and quality of the growth rate. These factors serve as the foundational levers through which businesses generate value, complemented by the quality of management and various other underlying aspects. In each of these aspects, which are crucial for value creation, we score very well. Our rate of growth will be superior.
Which segments or sectors do you think present favourable prospects for investors, considering that all levers are in place?
You should not ride any particular sector. What you should instead do is pick a particular business. India stands out as a counter-example due to its depth and diversity, a characteristic not present in many other economies. The key point here is that while considering sectors, India offers a multitude of diverse businesses. Hence, the investment focus should be on the micro, and not the macro watermark.
Also note that investing is not about riding a sector. This also means not riding on some theme or a trade or a fashion or a geopolitical event or some other factor. You don’t time the market, you don’t try to predict indices, and you don’t try to write a theme or the sector or the trend.
Investing is really a bottoms-up approach. You are buying a particular business because it is valuable. Why is it valuable? That’s because it is fundamentally meant to create superior, durable value. Also, because it is managed by people who have integrity, foresight, are competent, have good execution and sensible capital allocation and distribution capabilities. All that will change the character of the business and create a positive outcome.
Third is the size of opportunity. Not all economies can be large; there are only a few economies with a special set of circumstances that can become significant. Therefore, very few businesses really have the size of opportunity. Most of them are shallow ponds where the value creation is not as much, and that’s because of the size of the fish and not the pond as such.
How do you view the impact of geopolitical factors on global markets and, specifically, on India?
There is no man who lives on an island unaffected. The world is still materially linked to each other. Geopolitical behaviour may seem to break the world, but it is not so. We have to be mindful and observant to ensure that we remain in the relevant part of influencing that trend and ensuring that those changes don’t affect us negatively, but rather we gain from them as a country.
Investing is dynamic and forever changing, and will always be in a state of flux. Therefore, market volatility is a given. It was true for the last century, the last decade, last year, this year, and will be so next year. Occasionally, markets will be violent as well. When there is blood, there will be gore and there will be death, destruction, and mayhem on the street. But through all of that, the value creation opportunity in India, to my mind, remains phenomenal for an extended period of time.
Considering inherent volatility in the market, what advice would you like to give to investors on striking the right balance between active participation and maintaining a detached perspective to capitalise on market fluctuations?
If you watch the market too closely, you will see both volatility and violence. Watch things a bit too closely and it will also reveal yo-yoing changes. But if you see things with a more detached perspective, you will find an upward-sloping curve, with time on the x-axis and value on the y-axis.
The key is to observe the market with a bit of detachment and notice this upward-sloping curve. Investors need to maintain a level of detachment rather than doing constant scrutiny, even if they are actively participating. However, balancing these contrary perspectives is very challenging, as it’s difficult not to get carried away.
As a participant in the market, you are actively involved. However, to effectively play the game, you need to adopt a detached mindset. This duality is akin to a coach observing a hockey game, understanding team dynamics and interactions.
However, it differs from being a player on the ground. A player needs to recognise areas that need improvement and adjustments to elevate the game. This duality poses a challenge. It requires the ability to be both a skilled player as well as an insightful coach—a delicate balance that encapsulates the essence of investing.
kundan@outlookindia.com