Smart investors profit from correctly anticipating the likely churns in the market. In a highly competitive market economy, many old companies fade away and new ones emerge. This creates huge churn at the top. In the US, this churn at the top has been big. Nine out of the top ten companies by market cap in 2020 were not there 10 years ago, Microsoft being the only exception. FAANGs – Facebook, Apple, Amazon, Netflix and Google – together now have a combined market cap of a mind boggling $ 5.4 trillion. Investors who foresaw and acted on this seismic shift made a fortune. So, leadership changes in the market are important from investors’ perspective. Correctly anticipating the changes and investing based on that knowledge could be incredibly rewarding.
The degree of churn at the top, in an emerging market like India, is lower compared to the developed world. Even then, the churn is significant and investors can profit from the churn. It is important to appreciate the fact that churns get aggravated after a crisis. An important lesson from stock market crashes is the change in market leadership after the crash. Let’s take the crashes of 1992, 2000 and 2008. After the crash of 1992, Tech emerged as the leader and companies like Infosys and Wipro created huge wealth for investors. After the crash of 2000 non-tech sectors like infra, engineering and utilities emerged as leaders. After the crash of 2008 leadership passed on to FMCG, autos and pharma. In recent years, financials emerged as leaders with the leading private sector banks and some NBFCs creating phenomenal wealth for investors.
After the present crisis of 2020 too, new leaders will emerge. The process is already on. Which sectors are likely to be the new leaders?
Telecom emerging as a structural growth story
Telecom has emerged as a structural growth story in India. For sectors like IT, Work From Home (WFH) is likely to be a mega trend even post Covid. Secured Borderless Work Space (SBWS) is a clear emerging trend. The telecom success story in India is likely to get better going forward. The low ARPUs (Average Revenue Per User) and the near duopoly nature of the market – RIL and Bharti Airtel – bode well for the industry.
Benefit from Atmanirbhar
Atmanirbhar has emerged as the new policy mantra. In the current phase of deglobalization the Government of India is doggedly pursuing the policy of ‘vocal about local’. The consequent changes in import policies and tariffs will facilitate the emergence of new leaders. Manufacturing for defense is an area which has great potential. India has a few companies like L&T, Bharat Forge, BEL and M&M who have expertise in this segment.
Pharma will grow healing the world
Pharma gained from the pandemic. India’s stature as the ‘pharmacy of the world’ will gain traction, going forward. The market, sensing this, has already reacted smartly and the Pharma Index has become one of the best performing indices. And, this segment has emerged from the under-ownership of the last five years to a much sought after segment now. In terms of market cap, the pharma segment is not comparable to say, financials, telecom, autos or FMCG. But the prospects for the industry are bright. Segments like CRAMS (Contract Research and Manufacturing Services) have high potential.
Private banking will emerge stronger from the crisis
During 2018 and 19 the market became highly polarized with 12 to 15 stocks accounting for most of the gains in the benchmark indices. Financials, particularly private sector banking and the mortgage lender HDFC, led from the front. This is likely to change, but not very significantly. The leading names in private banking, though under a bit of a cloud now fearing the NPA crisis that looms large, will emerge from the crisis stronger. Within financials, insurance and asset management segments, have great potential.
Boys will become men
Then there are companies in different sectors emerging as leaders. There are many hidden gems in the market. These boys will grow up to be men in the years to come. But identifying this potential winners is a challenging task. It is better to play this game through the mutual fund route.